Egypt allowed its pound to tumble to a new low on Wednesday as the country struggles with a foreign currency crisis that is choking businesses.
The pound plunged as much as 14 per cent to trade at 32.2 to the US dollar.
The slump in the currency comes after Egypt has agreed to move to a flexible currency regime as part of an IMF $3bn bailout intended to help relieve a nearly year-long foreign currency shortage.
Since the central bank said it would move to a flexible currency rate in October, the pound has lost nearly 35 per cent as it has allowed it to devalue in phases. But analysts have warned that it has further to depreciate to ensure supply-demand equilibrium is restored to the foreign exchange market.
The weakness of the pound is adding to the pain of millions of Egyptians as it fuels inflationary pressure, with urban inflation hitting 21.3 per cent in December, its highest level in years.
It is estimated that 60 per cent of Egypt’s 100mn population lives below or just above the poverty line.
The Arab state has been hit by the headwinds of Russia’s invasion of Ukraine, which drove energy and food prices higher. It also triggered capital flight from Egypt, with foreign investors pulling about $20bn out of local debt in February and March last year.
The capital outflow triggered the foreign currency crisis and forced Cairo to borrow more than $13bn from Gulf states and seek assistance from the IMF for the fourth time since 2016.
Egypt’s central bank jacked up interest rates last year in an attempt to attract foreign portfolio inflows and finance the country’s account deficit. However, those measures have not relieved the pressure on the currency.
The $3bn IMF loan was agreed in October after months of talks, with the fund estimating that Egypt faces a $17bn financing gap over the next four years.
Analysts and business leaders say the nation’s woes have been exacerbated by the role of the military in the economy, which has expanded since President Abdel Fattah al-Sisi, a former army chief, took power in a 2013 coup.
As the military was put in charge of hundreds of infrastructure projects and extended its footprint across multiple sectors, it was blamed for crowding out the private sector and stymieing foreign direct investment needed to bring in sustainable sources of foreign currency.
Analysts also complain that the state has been living beyond its means as Sisi has pushed ahead with an array of big infrastructure projects.
Egypt is the IMF’s second-highest debtor after Argentina and has become increasingly dependent on support from oil-rich Gulf states, including Saudi Arabia, the United Arab Emirates and Qatar.
The IMF said on Tuesday that Cairo had agreed structural reforms to reduce the role of state entities, including military-owned companies, in the economy. It said Egypt needed “a permanent shift to a flexible exchange rate regime to increase resilience against external shocks and to rebuild external buffers”.
But the fund also warned that the “fiscal consolidation in the context of rising living costs could face political and social pushback”.
“The durability of the shift to a flexible exchange rate remains to be proven and the [central bank] may face political and social pressure to reverse course,” the IMF said. “The proposed structural reforms will take time to implement and deliver the intended results, while reforms aimed at reducing the role of the state may face resistance from vested interests in the country.”
The currency is approaching levels that are attractive to foreign investors, but interest rates on local debt will also need to rise to bring them back in force, according to Kevin Daly, an emerging markets fund manager at Abrdn.
“I wouldn’t expect to see a big inflow of dollars into the market until you get an adjustment higher in rates,” he said. Short-term government debt yields are at roughly 20 per cent, but would need to rise closer to 30 per cent to “get people out of their seats”, Daly added.