Egypt state banks have reportedly been propping up the Egyptian pound by selling their foreign exchange assets — a strategy that can only last a few more months, economists warn.
The pound has performed notably well compared to its other emerging market counterparts, falling only one percent against the dollar this year amid a wider EM sell-off. It has held between 17.78 and 17.98 to the dollar over the last six months, according to Reuters.
But capital flight out of Egypt has seen foreign holdings of Egyptian treasury bonds drop by $8 billion and the stock market fall by 30 percent, pressuring the currency.
Rather than intervening itself — a move that would draw swift rebuke from the International Monetary Fund (IMF), which in 2016 provided the country a $12 billion loan package — the central bank has leaned on state-owned banks to sell its foreign currency assets to offset that pressure, bankers and economists say. But propping up the pound by meeting that demand for hard currency has also meant a sharp and unsustainable drop in banks’ foreign assets, according to economic consultancy Capital Economics.
“It’s difficult to know for how long this process could be sustained. At the current rate of depletion, banks would exhaust their FX assets in eight months,” the consultancy wrote in a note published Tuesday, describing Egypt’s commercial banks as having “depleted their own FX assets.”
Between April and September of this year, banks’ foreign assets nearly halved, falling from $20.61 billion in April to $12.15 billion in September, their lowest level since early 2017. Reports of state-owned banks serving as the main suppliers of foreign currency may indicate backdoor intervention by the government, analysts have said.
Two primary options
This presents two possible scenarios, Capital Economics wrote. One would be to allow the pound to weaken in order to balance foreign exchange supply within the country. This wouldn’t be a massive shock to the currency thanks to previous austerity measures and that fact that it is not currently overvalued.
The other would be for the authorities to maintain a tight hold over the pound, using the central bank’s foreign reserves to support the currency – something Egypt’s central bank “is in a strong position to do for a limited period of time,” according to the consultancy.
But this would send a negative message about the government’s commitment to a freely floated pound. It would also make Egypt’s exports less competitive, tilting the balance in favor of imports and thereby widening the current account deficit, the degree to which a country’s imports exceed its exports.
Given the negative response that controlling the currency would likely garner from the IMF, Egypt is likely to let its currency weaken, the consultancy said. “Overall, we expect the pound to fall from 17.9/$ at present to 19/$ by the end of next year and to 20/$ by end-2020.”
Meanwhile, the country of 97 million is targeting a 6.5 percent growth for the 2019/2020 fiscal year, up from 5.3 percent this year, and in 2018 enjoyed its highest economic growth in a decade.
lofty macro figures
stem from a number of IMF-imposed structural reforms implemented by the Egyptian government since late 2016, alongside the international lender’s $12 billion loan. Egypt floated its currency, began reducing subsidies and raising taxes, and enacted a series of investment reforms.
But the cost of these austerity measures has been steep. Not long after President Abdel Fattah al-Sisi’s election in 2014 and the subsequent IMF loan — unlocked after Egypt unpegged its currency, the pound, triggering its 50 percent crash against the dollar — basic costs for Egyptians skyrocketed.
Poverty is on the rise, currently at nearly 28 percent, up from 25 percent in 2010 according to the World Bank, and wages have not kept up with the rise in living costs. Crime, corruption and pollution, as well as inadequate social services provision, continue to plague the country’s surging population. The World Bank cites high inflation and the erosion of real incomes as having “taken a toll on social and economic conditions.”
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