Is Egypt’s pound depreciation inevitable?
YOUM7 (Archive)

CAIRO: Further depreciation of the Egyptian pound is seen as very likely in the coming period, to follow with China’s unexpected yuan depreciation last month.

“China decided to devalue its currency by almost 2 percent. The move will make Chinese imports much cheaper and we believe that such a decision will take its toll on the Egyptian trade balance,” Mohamed Kotb Head of Mubasher Asset Management told The Cairo Post.

The Central Bank of Egypt has kept the pound steady at 7.73 per dollar after two consecutive depreciations in July, however, Egypt is likely to soon join around 22 emerging markets forced to depreciate their currencies. Experts are arguing that Egypt will not be able to resist the need to devalue its pound for long, as it will hurt its export competitiveness and efforts to bolster foreign direct investment (FDI.)

Egypt has been suffering a dramatic slip in its foreign reserves triggered from a plunge in FDI and tourist arrival since the January 25 Revolution in 2011, when they were valued at $35.8 billion. At July-end 2015, Egypt’s reserves stood at $18.5 billion.

China’s decision came after witnessing a remarkable drop in its exports that declined by 8.3 percent in July, triggered by a strong yuan and lower demand in the European Union, Kotb added.

Total trade volume trade between Egypt and China edged up from $10.2 billion in 2013 to $11.6 billion in 2014, of which $1.16 billion were Egyptian exports to China, and $10.46 billion were Egyptian imports from China, according to date from China’s embassy in Egypt.

“Cheaper Chinese merchandise should encourage more imports from the world’s second largest economy and hence could widen the already inflated trade deficit and put more pressure on the balance of payments,” Kotb said.

He continued that cheaper exports from China will further shrink the attractiveness of local production for consumers who will prefer imported goods for a lower price, “a move that would be of a damaging effect to the local companies and the whole economy in turn.”

“Accordingly, we believe the CBE has to take an action to defend the competitiveness of local merchandise and prevent the country from a possible hike in the Chinese exports via conducting further managed devaluation to its currency,”  Kotb concluded.

Economist and financial analyst Hany Tawfik, who welcomed the pound depreciation earlier in January, said “Like it or lump it, depreciating the pound is unavoidable; otherwise Egypt will receive a tough blow, especially with more than 20 countries floating their currencies, including Kazakhstan which applied a 27 percent devaluation.”

In a phone interview, Tawfik told The Cairo Post: “Hisham Ramez, the CBE governor, is suspending any further depreciation until he ends his incumbency in November.”

Gradual floatation of the pound along with promoting intense-labor industries in the domestic market is a “must” in this phase to ease the negative impact of a cheaper yuan, said Tawfik.

For Tawfik, who heads the Egyptian Private Equity Association, “there is no fair value for the pound against the dollar,” arguing that supply and demand determines the real value of the local currency.

While raising interest rates is one of CBE actions to absorb cash liquidity to control two-digit inflation, it further burdens the government’s public debt service.

“Depreciating the pound will ultimately have negative impacts on the low-income people, as well as government debt,” said Tawfik, who criticized the government for what he called “lack of coordination” between both fiscal and monetary policies.

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