7 reasons led to CBE’s EGP devaluation against dollar in 2 days: Expert

Hossam Mounir
6 Min Read
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Ezz Eldeen Hasanen, General Manager at a private bank , a banking and economic expert Photo Handout to DNE

The Central Bank of Egypt (CBE) surprised the market on 2 July with a sudden increase in the dollar price against the Egyptian pound by 10 piasters. This decision was swiftly followed by another increase of the same value on 5 July.

The CBE’s sudden move raised many questions in the market, especially regarding its timing.

In an interview with Ezz Eldeen Hasanen, General Manager at a private bank and a banking and economic expert, Daily News Egypt attempts to answer many of the questions raised on the matter.

In your opinion, what are the reasons behind the CBE’s raising the value of the dollar against the Egyptian Pound?

In my opinion, this move by the CBE had seven reasons, they are:

First, the decline in foreign currency reserves which reached $20bn, 60% of which are deposits of a number of friendly Gulf states in light of the decrease in dollar sources that feed the reserves, mainly tourism and export earnings.

Second, reducing the gap between the official and nonofficial dollar prices in the Egyptian market, which has relatively increase over the past month.

Third, reducing the import bill, that reaches $65bn per year, with at least 10% for luxury commodities.

Fourth, an attempt to attract foreign direct and indirect investments, especially the hot money invested in the Stock market, Treasury bills, Treasury bonds, and stock exchange.

Fifth, a pre-emptive strike by the CBE for attempts of increasing imports from Europe, especially the crisis in Greece, and the slowing down in the EU and Eurozone’s economic activity which will result in a price decline in these countries. This decline may reach 50%, which would increase the appetite of Egyptian importers to hurry in heavy imports from Europe.

Sixth, it is a tactical plan by the CBE to hit the parallel markets and speculators on the dollar.

Seventh, the devaluation of the EGP may be in line with the desire of major foreign companies, as they desire the EGP’s devaluation, until it reaches a state of complete floating so as to determine its real price against the dollar.

What are the negative effects of devaluating the EGP against the dollar?

First, an increase in the import bill, and thus increasing commodity prices in markets and high increase in inflation rates, which would harm social peace. This is because more than 60 million citizens have an income that does not exceed EGP 3,000, and they will suffer from the decline in purchasing power and endure the high prices.

Second, a decline in revenues and profits of foreign companies and banks operating in Egypt, which may lead them to cut their Egyptian labour or restrict the distribution of profits to employees.

Third, increasing the phenomenon of dollarisation, as speculators will want to possess more dollars hoping for an increase in its price so as to achieve capital gains.

Fourth, increasing budget deficit because of the increase in demand of national currency does change it into dollars for the payment of interests and instalments of external loans.

 

What are the positive impacts of this step by CBE?

Regrettably, the positive impacts of this decision may not take place in this period, for other reasons out of the CBE’s control.

First, when devaluation of a local currency occurs, a jump in exports is supposed to happen. However, since most export inputs are imported, the exported commodity price will not have a competitive advantage abroad.

Second, it should attract more tourists. Nonetheless, the security situation in Egypt in fighting terrorism stands in the way of achieving this goal.

Third, it should increase transfers from those who work abroad. This, however, may not happen because many Egyptians in Libya, Syria, Iraq, and some Gulf countries are coming back to Egypt.

Fourth, it should decrease imports, and I believe that this decision will relatively lower imports.

Fifth, if the aim is to increase revenues from the Suez Canal, the devaluation of the Egyptian pound against the dollar may impact on ships traffic in the canal.

What are your expectations for the next step by the CBE with regards to the dollar price against the pound?

I believe that if the CBE maintained the dollar price against the Egyptian pound at this rate in the dollar sell bid to banks which will be offered on Thursday, it means that it will stay at this rate for at least three months. However, if it decides to lower the devaluation rate, it will mean that the CBE aims at a level of EGP 8 as the official dollar price against the pound.

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