The price of the Egyptian pound against the US dollar has witnessed significant fluctuations since the flotation decision on 3 November.
Last week, the price of the dollar significantly increased against the pound, reaching its highest level at EGP 19 per the dollar.
That significant increase in the dollar’s price raised many fears and questions about the future of the pound’s price against the dollar, as well as the factors affecting the determination of that price.
(Photo Handout to DNE)
Do not worry about the changes the exchange rate has seen recently or about the continuation of the relatively gradual increase in the dollar’s price against pound, advised Mohamed Abdel Aal, a board member of both the Suez Canal Bank and Arab Sudanese Bank, who is also a highly-revered expert in exchange market affairs.
We previously asserted that this situation is considered quite normal for the period following the flotation, said Abdel Aal, who noted that all other countries that have floated their national currency have witnessed similar fluctuations.
He said also that the problem is not in the exchange rate or the flotation, but in the economics system as a whole. The exchange rate is just a drop in the sea of the economic reform programme that Egypt has begun executing with the support of the International Monetary Fund (IMF), said Abdel Aal.
That programme is being carried out under difficult circumstances, both in the local market and abroad, which has affected the citizens and the state as a whole, he said.
Abdel Aal noted that the decision will need some time before it has positive impacts on the economy, exchange market, and citizens.
We must be aware that there is a difference between the climate and mechanisms of trading before and after the pound’s flotation, he explained.
He said also that the fixed or controlled exchange rate does not usually reflect any political or economic decisions, unlike the free exchange rate, which is immediately affected by any political or economic events.
There are six important factors currently controlling the exchange rate in Egypt, said Abdel Aal.
The first of these factors, according to Abdel Aal, is supply and demand, which is affected by the increase or decrease in the use of foreign currencies, which is essentially associated with imports and exports, as well as foreign currency resources.
The second factor affecting the exchange rate is speculation on the market, said Abdel Aal explaining that there is a psychological aspect to this factor, as people fluctuate in whether they want to save in dollars or gold out of fear of the pound’s decreased purchasing power.
There are also factors associated with recent political events and an unstable security situation. These factors affect the exchange rate in Egypt, like the rest of the world’s countries, according to Abdel Aal.
(Photo by Nagy Youssef)
Another factor affecting the exchange rate is the period that preceded the pound’s flotation when there was a marked absence in hard cash and dollars. The dollar crisis created a host of problems between banks unable to provide foreign currency to their customers. However, it would appear that this problem is on the way to being solved, and it may be a contributor to why the price of the dollar has fluctuated recently.
The decrease in oil prices has affected some countries’ ability to support the Egyptian economy, said Abdel Aal. This resulted in Egypt being unable to offer its intended bonds in the international market, which directly affects resources in foreign currencies.
There is another important factor that affects the exchange rate in Egypt: the extent of society’s ability to understanding the circumstances the state is going through and the effects of the pound’s flotation. This has a major affect on social stability and consequently the stability of the exchange market, according to Abdel Aal.
Abdel Aal said that an imbalance in the exchange rate could possibly remain for the coming six months.
During that period, Abdel Aal believes that the price of the dollar will rest at around EGP 17, but gradually decline to EGP 14-13.
Abdel Aal considered it unlikely that the dollar would reach as high as EGP 20, unless unexpected events take place that would leave to a further devaluation of the pound.
He expected the dollar to decrease to EGP 17 by the end of the week, adding that it is possible that price would again to EGP 18 during the final days of 2016 while some companies finalise their budgets.
According to Tamer Yousef, head of the treasury department at a foreign bank operating in the Egyptian market, under the flotation system, the exchange rate is primarily affected by the supply and demand of foreign currencies, as well as market conditions and economic indicators, which is quite normal.
He noted that the demand for dollars can be seasonal, which includes the period for finalising budgets and transferring profits belonging to foreign companies.
Yousef considered it unlikely that the reason behind the recent increase in the dollar’s price against the pound is for covering importing operations, because the current price of the dollar does not encourage imports.
He expected also the supply of dollars will increase in January due to the increase in foreign investment that will focus on investing in government debt instruments and issuing international bonds.
Yousef also noted that the tourism sector has been negatively impacted by events, such as the Russian aeroplane crash last October, which subsequently affects revenues. “However, tourism was already struggling and banks do not rely on that sector for hard cash,” he added. “The exchange rate has not and will not be impacted by these events.”
