The Egyptian pound has been weakening since President Mohamed Morsi’s attempts in November to fast-track the approval of a new constitution by awarding himself sweeping powers, and analysts warn that the risk of a full-blown devaluation is very high.
A $4.8 billion agreement with the International Monetary Fund (IMF), which Egypt had almost clinched but which was postponed because of street protests triggered by Morsi’s actions, is crucial to avoid a chaotic fall of the pound.
“The IMF remains committed to support Egypt in addressing its increasing economic challenges ... I am encouraged by the authorities’ commitment to take steps necessary to achieve fiscal and external sustainability,” Masood Ahmed, director of the Middle East and Central Asia Department of the IMF, said on Monday after a visit to Cairo.
A team of IMF experts will go to the Egyptian capital over the next weeks to discuss the details of the agreement.
The government has very little room for manoeuvre to help the economy adjust in an orderly manner because of the strain on external accounts and the “rapidly deteriorating” public finances, according to Simon Williams, chief Middle East economist at HSBC.
The street unrest in December and the delay in sealing the IMF deal have forced the central bank to tighten restrictions on foreign exchange outflows while allowing the Egyptian pound to depreciate.
‘FORCED SHIFT’
This “forced shift in stance” came after two years in which the Central Bank of Egypt (CBE) spent $30 billion of its $45 billion reserves trying to defend the currency, Williams noted.
On the fiscal side, revenues increased by a little over 13% in the first 10 months of last year, almost three times slower than the increase in expenditure over the same period, he said. Gross public debt is at an all-time high approaching 90% of GDP while the budget deficit almost doubled from its level before the Arab Spring revolution. “With debt so high, reserves so low, and economic losses so heavy, is seems unlikely that the status quo can hold,” said Williams.
“Instead, we see only two possible outcomes at this juncture – a slow improvement in economic performance as political stability improves, or a rapid and disorderly deterioration as the political transition stalls.”
William Jackson, emerging markets economist at Capital Economics, said that the progress of the talks with the IMF was crucial for whether Egypt’s adjustment would be orderly or disorderly.
Noting that the Egyptian pound fell by over 4% since the announcement of the CBE at the end of December that its reserves had reached a “critical minimum,” he estimated that in the case of an orderly adjustment, the currency was still likely to fall by 15%.
“But without IMF support, there is a real risk of a more disorderly devaluation, whereby the pound could plunge by up to 50%,” he said.
The pound’s weakness has affected the country’s oil imports. Reuters reported that the state company Egyptian General Petroleum Corporation (EGPC) only bought half of what it was seeking in a tender for crude because of lack of money.
On Tuesday, Qatar lent Egypt $2 billion and gave it another $500 million to relieve the pressure from President Morsi during the negotiations with the IMF.