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Egypt: further currency devaluation expected

March 30, 2023 at 11:17 am

A man counts Egyptian pounds at currency exchange shop in downtown Cairo. [KHALED DESOUKI/AFP/Getty Images]

Analysts have predicted that the Central Bank of Egypt will devalue the Egyptian pound against the US dollar again today, after the widening gap in exchange rates between the parallel and derivative markets. Analysts expect that the devaluation will coincide with the Monetary Policy Committee meeting.

Gergely Urmossy, Vice President and Emerging Markets Strategist at Societe Generale Bank, was quoted as saying that there is no more appropriate time than now to align the exchange rate with financial fundamentals. “This week’s meeting will be one of the most anticipated events in Africa,” he added.

The dollar is currently trading at 35-36 pounds in the parallel market, while non-deliverable forward contracts for a period of 12 months reach 40 pounds. The official price has been at 30.96 pounds for about three weeks. The new official rate may range between 35 and 40 pounds per dollar.

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“Another devaluation is widely expected, but in and of itself, we don’t see it bringing much-needed capital inflows,” explained Monica Malik, the chief economist at Abu Dhabi Commercial Bank. “There should be meaningful signs of progress on reform to help begin rebuilding investor confidence, including real flexibility for the pound, tighter monetary policy and the government’s offering programme.” She expects the pound to drop to the 36-38 level against the dollar.

According to Reuters, the decline of the Egyptian pound on the black market is still insufficient and the Central Bank may have to allow it to fall further. Despite its pledge in October that supply and demand would be the mechanism determining the exchange rate, the bank manages the currency in a narrow range that has remained virtually unchanged.

A Reuters poll conducted on Monday showed that the Central Bank of Egypt is expected to raise overnight interest rates by 200 basis points on Thursday as it struggles to control soaring inflation.

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