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An overvalued Egyptian pound increases the risk of default – Capital Economics


Any further delay in the genuine adoption of a flexible exchange rate would make it harder for Egypt to move out of its economic crisis and would increase the risk of sovereign default, London-based think tank Capital Economics said.

Egypt’s external position has deteriorated in recent months as its short-term external debt, estimated at $30.2 billion, represents 89% of Egypt’s total foreign reserves.

In May, Moody’s put Egypt’s B3 ratings on review for downgrade, citing foreign liquidity shortage. For similar reasons, credit rating agency Fitch’s downgraded Egypt’s outlook from B+ to B.

“The elephant in the room remains the pound. It is almost a year since the CBE pledged to adopt a flexible exchange rate, but since January the currency has been de-facto pegged to the dollar,” Capital Economics said in a briefing issued on Thursday. 

The report alluded to growing rumours that Egyptian authorities would not embark on any devaluation of the pound until the presidential elections are concluded. The actual date of the poll has not been announced yet; however, media reports suggest that it might take place in December. 

The London-based think tank contends that Egyptian government is “playing a dangerous game” by delaying another devaluation of the local currency. As the pound is losing more of its value on the back market, policy makers should act soon in order to secure the second tranche of the IMF loan and encourage the Gulf to pump investments in Egypt, Capital Economics said.

Since March 2022, the Egyptian pound has lost more than 50 percent of its value following the Russian war on Ukraine. 

Yet the currency is believed to be significantly overvalued. Officially, it trades at 30.9/$; however, it reached 40/$ on the black market.

Earlier this year, the Egyptian government unveiled a plan to privatize dozens of state-owned enterprises, inviting foreign, mainly Gulf-based, investors to join in. The dualism in the exchange rate has been seen as the main reason why the program has failed to attract significant investments from Arab Gulf countries.

Source: ZAWYA

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