I wrote – Manal Al-Masry:
Bankers and economists said that the Central Bank of Egypt chose to follow the policy of gradually reducing the exchange rate of the pound against the dollar, and this is what is happening on the ground currently, in order to avoid price shocks and high rates of inflation in the event that the price of the pound leaves a sharp reduction.
And dollar prices continued their gradual rise against the pound in banks during the past two days, in continuation of what they have witnessed in the past weeks, as it increased by 3 piasters on Sunday, and 2 piasters on Monday.
This comes amid expectations that Egypt will continue to follow a flexible exchange rate policy, as part of the measures that may be included in the ongoing negotiations with the International Monetary Fund to implement a new economic reform program that includes obtaining financing.
Last month, President Abdel-Fattah El-Sisi appointed Hassan Abdullah as acting governor of the Central Bank of Egypt, which was followed by expectations that Abdullah would violate his successor’s policy regarding the policy of moving the currency rate in case of need, as happened on November 3, 2016.
The price of the pound against the dollar has witnessed a noticeable decline since March 21 until now, as the price of the dollar rose by more than 22%, bringing its average price in banks currently to 19.31 pounds for purchase, and 19.39 pounds for sale.
Dr. Fakhry El-Feki, a professor at the Faculty of Economics and Political Science at Cairo University, and head of the Parliament’s Plan and Budget Committee, told Masrawy that the central bank is currently moving towards an exchange rate policy that depends on a gradual reduction, which is a required measure to address the current economic conditions.
He added that the central bank is likely not to follow the policy of moving the pound once again to avoid price shocks and high inflation.
The former Central Bank had announced the liberalization of the exchange rate in November 2016, so that Egypt would switch to a free exchange rate that is determined according to the mechanism of supply and demand in banks, but last June, the governor said that monetary policy at the time of the Corona pandemic returned to following the policy of stabilizing the exchange rate to avoid the presence of price shocks.
Fakhri Al-Fiqi explained that the gradual reduction helps the central bank to reach the fair price of the pound in accordance with the policy of supply and demand by the end of this year, with the growth of foreign exchange inflows resources to avoid the market from price shocks and high inflation.
El-Feki added that foreign exchange resources began to improve greatly, which includes Suez Canal revenues, remittances from Egyptians working abroad, exports, and direct investment, which might strengthen some of the pound’s position against the dollar to reach by the end of the year 20 pounds.
He explained that the International Monetary Fund, when determining the exchange rate of the pound, considers the ability of the banking sector to manage the needs of documentary credits, whether a managed or free exchange rate. If supply is equal with demand, there will be no conflict with the fund’s policy.
Mohamed Badra, a banking expert, said that the central bank is currently working to switch to a smartly managed exchange rate policy by gradually reducing the pound, which is a successful policy managed by the new central bank governor, relying on his experience and specialization in managing international transactions and the treasury until it reaches a fair price of the pound.
Badra added that not following the policy of decreasing the exchange rate in one go would spare Egypt the occurrence of price shocks and an inflationary wave, and that some traders did not exploit their ambitions to raise prices sharply.
He stated that the Egyptian economic conditions are in line with the policy of gradual reduction until the fair price of the pound is reached, according to the mechanism of supply and demand.
And the Central Agency for Public Mobilization and Statistics announced, in a statement last Thursday, the return of the rise in the annual inflation rate for the total of the Republic in August after its decline for two consecutive months, recording 15.3% compared to 14.6% in July.
The annual inflation rate in cities rose last August to 14.6 percent, compared to 13.6 percent in July, according to the agency’s data.
Meanwhile, the Central Bank announced a rise in the core inflation rate prepared by it to 16.7% last August, compared to 15.6% in the previous July.
The annual inflation rate in cities still exceeds the target range set by the Central Bank for the annual inflation rate at the level of 7% (+ or minus 2%) on average during the fourth quarter of 2022.
A member of the board of directors of a private bank told Masrawy that the central bank is following the policy of gradually reducing the price of the pound against the dollar, expecting it to continue to follow the same approach to avoid free-floating damage, according to specific feasibility policies.
He added that leaving the exchange rate to the market rate completely in the current period once will lead to the difficulty of predicting the dollar exchange rate in light of the great pressure on the pound as a result of the increased demand for foreign currencies against the decline in supply.
He continued, “But the monetary policy currently has a great deal of intelligence in following a gradual devaluation of the local currency until there is a breakthrough in foreign exchange resources that will enhance the strength of the pound against the dollar.”
The member of the board of directors believes that the monetary policy in the Central Bank has set a fair price for the pound against the dollar, and it will reach it gradually in order to avoid price shocks, especially since many of the products traded in the Egyptian market are imported and will directly affect the consumer.
Sahar El-Damaty, a banking expert and former Vice President of Banque Misr, told Masrawy that the central bank is following the managed exchange rate policy to avoid negative repercussions and high inflation rates, and that it will most likely not take action to significantly reduce the price of the pound at once.
Al-Damaty added that the managed flotation will make the new governor more able to control inflation compared to leaving the exchange rate completely at the market rate, which may result in negative repercussions.
Big cut on the way
For his part, Hani Genena, an economist and lecturer at the American University, disagreed with this trend, and told Masrawy that the gradual devaluation that is currently taking place in the pound exchange rate is expected to be a prelude to a significant reduction, equivalent to an increase in the price of the dollar by between 10% and 15% during The coming period is the same level at which some traders are currently priced commodities.
He explained that the central bank is currently reliant on the gradual reduction of the exchange rate until the completion of some procedures before releasing the hand of the pound against foreign currencies, as it is currently working to complete negotiations with the International Monetary Fund, and allow sufficient time for companies and banks to settle their positions before this procedure to avoid any damages. on them.
Geneina added that managed flotation is not suitable for Egypt, as it will lead to price distortions and give a distorted message of a deficit, as well as pressure the Central Bank to intervene with the foreign exchange reserves to support the pound.
He mentioned that the free exchange rate may raise the prices of some commodities that are not priced at the market price, such as government goods, whether subsidized or not, but it would be better than the scarcity of these commodities.
Hani Genena explained that the increase in the prices of goods with their availability would be better for the citizen than the lack of them and would push him to rationalize his expenses, as well as help to operate the wheel of production in factories.
He added that Egypt is in line with it during the current period at a free exchange rate in light of the lack of sufficient dollars in foreign exchange reserves to manage the exchange rate, but the exchange rate can be managed on the other hand by raising the interest rate to reduce domestic spending and achieve balance.
He explained that managing the exchange rate would be feasible in the event that there are large dollar flows of exports and investments and a large cash reserve of 100 billion dollars.
The foreign exchange reserve at the Central Bank of Egypt declined for the fourth consecutive month and for the fifth time during the last 6 months last August, but it declined at the least pace, which is considered relatively stable.
The reserve decreased by about one million dollars during August, according to what the Central Bank recently announced, to reach the level of 33.142 billion dollars at the end of last month.
Despite this, the reserve lost about $7.8 billion of its value by 19% during the first 8 months of this year, coinciding with the repercussions of the Ukraine crisis on the global and local economy, and the policy of raising interest rates globally, which necessitated the use of part of this reserve during some of these months.