CAIRO: The Egyptian pound hit its weakest official price as the Central Bank of Egypt (CBE) let it weaken to 7.29 per U.S. dollar at an exceptional auction on Tuesday, amid expectation of extended slip in the coming days.
Egypt’s local currency lost ground for a third day in a row against the dollar, reaching 7.19 and 7.24 on Sunday and Monday, respectively. This is the third depreciation this week and the lowest since auctions began in December 2012.
The bank offered $40 million and sold 38.4 million at a cutoff price of 7.29 pounds per dollar, the central bank posted on its website.
“The dollar was sold at 7.90 EGP on the black market Tuesday,” a trader told The Cairo Post. Another trader confirmed that the Egyptian pound is greatly expected to hit lower levels in the coming period.
The central bank’s move to let the Egyptian pound depreciate starting Sunday came shortly after its Monetary Policy Committee (MPC) decided Thursday to cut key interest rates by 50 basis points.
“The CBE’s decision to decrease the value of the local currency will lure fresh investments as it will motivate foreigners and Arabs who prefer to use the dollar in their transactions to achieve higher returns on their investments,” economic expert Dr. Abdel Rahman Taha told The Cairo Post.
Such a move after applying reforms on a subsidy system and raising fuel prices by 78 percent in June, means that Egypt’s government is applying the International Monetary Fund’s (IMF) recommendations after a mission concluding the 2014 Article IV consultations in November.
“While there has been a notable movement of the nominal exchange rate over the past two years, a more flexible exchange rate policy focused on achieving a market-clearing rate and avoiding real appreciation would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment,” the IMF’s mission head Chris Jarvis said after concluding his visit to Cairo.
This would foster growth and jobs and reduce financing needs, added Jarvis in an IMF statement.
“Egypt’s exports will receive a boost from raising the value of the dollar against the Egyptian pound. By luring new investments new projects will be implemented, offering new jobs for the Egyptian youth and the high unemployment will decrease gradually,” Taha said.
He predicts that Egypt’s foreign reserves will likely improve in the coming period as inflows from FDI and exports will increase due to the dollar price hike. The mega and national projects launched recently like the Suez Canal Axis Development are to be more attractive for foreign investors, he added.
“Adopting a more flexible exchange rate policy will help upgrade Egypt’s credit rating in the coming period,” Taha said.
Last month, Fitch Ratings raised Egypt’s long-term foreign and local currency issuer default ratings (IDR) to “B” from “B-,” and the outlooks were maintained at “stable”.
“Political stability has improved under President Sisi… this reflects a desire for stability, a clampdown on political opposition and an improving economy,” Fitch stated.
In October, Moody’s Investors Service, a global credit rating agency and provider of financial analysis, upgraded Egypt’s investment outlook to stable from negative but government bond’s rating was affirmed at “Caa1.”