Could the Egyptian pound be devalued again?

Nation set to finish the year with lower external debt and higher net reserves, but geopolitical tensions loom

People walk past a currency exchange point in Cairo. Reuters

Concerns among Egypt's population that another devaluation of the local currency is looming are most probably unfounded, according to analysts.

The Egyptian pound dropped to its lowest official rate last week when one US dollar began trading for 50 pounds. Before the latest drop, the dollar had been trading between 48 and 49 pounds.

The pound has continued to depreciate marginally against the US dollar over the past week and the exchange rate on Friday morning at the Central Bank of Egypt was 50.82 pounds per US dollar.

The pound was devalued in March to qualify for increased IMF funding, declining in value by over 60 per cent. The devaluation, the fourth since 2022, significantly raised the cost of living across the board to the detriment of millions of Egyptians whose incomes have not increased enough to account for it.

While the recent drop in the currency’s value was not significant, it has resulted in concern among importers and manufacturers whose livelihoods are directly affected by the fluctuations. Most industries in Egypt regularly require imported components to keep their operations going.

People are also concerned that food, transportation and other routine costs will increase as well.

“The fifty-pound-mark is a psychological threshold for many Egyptians. It isn’t entirely rational but I think this is why there is such an uproar over this latest drop in the value of the pound,” said Karim El Omda, an economist, "There's no reason to assume that the government will devalue, in fact the consensus is that the USD will come back down to 49 or 50 once all the disruptions from the US elections are over."

The drop in the currency's value came after remarks by Prime Minister Mostafa Madbouly two weeks ago advising Egyptians “not to panic” should any decreases in the value of the pound be recorded.

“We are operating under a flexible exchange regime now and marginal increases and decreases are only normal,” he said on November 28. The IMF and Fitch Solutions have confirmed that the country is currently operating an entirely market-determined exchange rate.

However, Mr El Omda argued that without the black market, which was eliminated by the government this year, it is difficult to ascertain whether a genuine supply and demand system free from government intervention is in place.

“I am not convinced that the exchange rate is entirely flexible as it would be very destabilising for a system that has regulated its financial markets for so long. I also don't think it would be advisable for them to do that yet,” he said.

Despite Mr Madbouly's intentions to dispel fears in the market, his speech had the opposite effect, according to financial analyst Mohamed Ragab, who told The National that the consensus among many Egyptian economists at the moment is that the speech was a “bad idea” as it spooked some businesses into raising their prices.

The country’s telecoms companies have announced a price increase of 30 per cent, effective January 1.

“Many economists, me included, were left scratching our heads a little after we saw Mr Madbouly’s speech. Perhaps he was aiming to be transparent or he was concerned by a recent increase in hot cash leaving the central bank’s coffers, there could have been many reasons, however, the result was a great deal of anxiety,” Mr Ragab said.

According to him, the appreciation of the dollar has also made some investors pull their money out of Egypt’s debt instruments, which the government continues to rely heavily on for its short-term financing needs.

The Trump effect

The marginal increase in the US dollar’s value was attributed by Mr Madbouly to an increase in investor confidence that has taken over US financial markets since Donald Trump’s victory in November’s US presidential election.

“The dollar has strengthened against a number of currencies over the past few weeks. These include the euro and the yuan. Both of their values against the Egyptian pound have decreased over the same period that the dollar has risen,” Mr Ragab said.

Another reason the dollar has appreciated against the Egyptian pound is a recent rise in forex demand for imports by Egyptian businesses preparing for the Ramadan season (which always comes with a sharp rise in consumption), which is only three months away, he said.

Economic recovery

However, the dollar is not likely to increase by much against the pound in future months, the analysts said.

“The main obstacle to the country’s economic recovery right now is geopolitics. That is also the part that remains unpredictable about the new fiscal year, which has made predictions by international financial institutions less reliable and more tentative,” Mr Ragab said.

Revenues from Egypt’s Suez Canal, one of the country’s main sources of foreign currency, have dropped by between 50 and 60 per cent because of disruptions to Red Sea shipping by Houthi rebels in Yemen acting in solidarity with Hamas in Gaza and its continuing struggle against Israeli military aggression.

With 2025 weeks away, Egypt’s economic position is much better than it was last year, with net foreign reserves up by $11 billion and external debt decreasing to just over $152 billion when it was about $168 billion at the end of last year.

These improvements were largely made possible by an influx of $35 billion from the Ras El Hekma deal between the Egyptian government and a UAE-led consortium. The government also finalised several other financing deals this year, which contributed to the improvement in the country’s external position.

“Egypt was fortunate to receive so much assistance from our neighbours and international partners. But we mustn't forget that these were bailouts from external sources and not a result of the government’s policies,” Mr El Omda said.

The Central Bank of Egypt sold local treasury bills in various tenors, amounting to over 450 billion pounds between November 1 and December 12.

The government's continued reliance on debt instruments and hot cash remains a concern that it will have to deal with later when the economy has recovered past the “critical stage”, he said.