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Egypt just massively devalued its currency — here’s what happens next

Egypt just massively devalued its currency — here’s what happens next thumbnail

Egypt’s central bank floated the pound on Thursday in an attempt to stabilize its economy, which has been hampered by a shortage of dollars.

The currency was initially devalued by 32.3% to about 13 pounds per dollar, down from the previous peg of 8.8 per dollar, which had been in place since March. It has since tumbled further, and is now down by about 50%.

At the same time, the central bank also hiked rates by 300 basis points in an attempt to curtail the inflation that’s likely to follow the weaker exchange rate.

The devaluation of the pound was one of the key demands by the International Monetary Fund in order for Egypt to receive a loan of $12 billion over three years. The IMF has yet to officially ratify the loan, but it is seen as crucial in helping to stabilize the country’s economy.

As for what a devalued currency means for Egypt, Jason Tuvey, Middle East economist at Capital Economics wrote that, “in the short term, the weakening of the pound will inevitably involve some short-term pain. Inflation, which is already high following March’s devaluation, is likely to rise.”

Despite that short-term pain, the devaluation stands to help the country in the long-run and is likely a welcome sign for foreign investors.

As Tuvey explained in greater detail:

“By floating the pound, the central bank will eventually be able to fully dismantle FX restrictions, reducing disruptions to activity. A weaker currency would also boost external competitiveness and encourage foreign investors back to the country. All of this would help to place Egypt’s external position on a more sustainable footing and, if backed up by further economic reforms, should ultimately support stronger economic growth.”

Egyptian stocks soared immediately following the announcement, with the country’s main stock index, the EGX30, surging by about 8%. Stocks have since retraced earlier gains, and are up by 3.4% as of 1:05 p.m. ET.

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The Egyptian economy has been struggling since 2011, when President Hosni Mubarak was ousted.

The current president, Abdel Fattah al-Sisi, had outlined “an ambitious plan to develop agriculture, housing, education and impoverished areas” in his election campaign and promised that Egyptian would see their living standards improve within two years. But the country has seen economic problems intensify over the last few years amid a collapsing tourism sector and lower oil prices.

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Tourist arrivals to Egypt plunged dramatically after the Arab Spring revolution, and again after last year’s downing of a Russian aircraft on Egypt’s Sinai Peninsula shortly after take off from Sharm el-Sheikh. This has been problematic for Egypt given that its tourism sector is a major sourceof hard currency.

The resulting shortage of hard currency has been acutely felt by the country, which heavily relies on imports. Most notably, there has been a shortage of sugar; and on Wednesday, CNN reported that the government seized about 9,000 tons of the commodity in raids.

Moreover, lower oil prices have indirectly hit the economy as well. With economic growth sputtering elsewhere in the Gulf region, companies have been laying off employees — many of whom are foreign workers, including many Egyptians working abroad. And this has been problematic for Egypt, which is one of the more exposed countries to the Gulf slowdown and is dependent on remittances from citizens working abroad.

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Total remittances into Egypt had been falling by about 15% year-over-year back in May, according to earlier data cited by Capital Economics, which hurts household consumption.

In any case, although devaluing the currency will likely be a positive development in the long-run, it’s not going to fix everything immediately and there are still short-term hurdles.

Specifically, a spike in inflation could be acutely felt given the heavy reliance on imports. A BMI Research team forecast that consumer price inflation could reach 30% by the end of 2016, up from 14.1% in September. (Although, as noted above, the central bank’s rate hike could dampen the effect.)

Furthermore, “even with the lower rate, Egypt is still far from competitive for many businesses to invest, particularly compared with Morocco and Eastern Europe,” the BMI Research team wrote. “A new investment law is expected in 2017 which will go some way towards improving the situation, but there has been an absence of clarity on what this will entail.”

“In addition, high inflation and social instability are also major risks which outweigh the positive effects of the new exchange rate,” they continued. “Indeed, the much-weaker currency is certainly a positive and necessary step over the long term for the economy, but it will be no panacea for Egypt’s economic malaise.”

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7 Comments on "Egypt just massively devalued its currency — here’s what happens next"

  1. peakyeast on Sun, 6th Nov 2016 1:51 pm 

    Stabilizing Egyptian economy by giving a little money, devaluation and interest hike?

    Only an economist could be stupid enough to think that that will help in a country whose oil income is in free fal(and only recently crossed the boundary btw. Im and Ex-port), its population breeding like rabbits, and its water and agriculture severely stressed.

    I believe even KSA has gotten tired of acting like the golden goose recently – probably realizing this is not going to end well. And now IMF is demented enough to throw more resources at them?

    Without a plan for the future this is not only a waste of money and resources, but also postponing and worsening the actual problem. Howz that for damage control and intelligent world leadership?

    We can see in Greece how well austerity and loans work… A zombie country constantly tethering on the edge of the abyss waiting for some global economic upturn. It seems very unlikely that EVER will come in the size and duration that is necessary….

  2. Anonymous on Sun, 6th Nov 2016 3:59 pm 

    BI = Bullshit Insider

    Egypt, has too many people, exploiting a shrinking resource base. Put another way, the country is a net importer and consumer of resources and goods, it has nothing the world really wants to needs. Or if that’s too harsh, what they do export or produce, is not sufficient to carry the country.

    So BI cant yammer all it wants about making ‘foreign investors happy’ (just who are those investors anyhow?). They can also talk about manipulating things like exchange rates, currencies, interest rates and so on, all ostensibly to ‘fix’ the economy there. But again, a country that is a net importer of just about everything, and a rapidly growing( and largely impoverished) population, cant be ‘fixed’ by manipulating various benchmark rates by a few decimal points here and there.

  3. peakyeast on Sun, 6th Nov 2016 5:12 pm 

    I suppose the IMF sees a great future for egyptian exports..

    That can happen in two ways: Either they export humans – which are not worth their weight in meat and bones.

    Or they reduce consumption of their oil until they can export it and pay for their loans. Keep in mind this is getting hastily more difficult.

    No… A suggestion to what is happening could be: The importance of the Suez channel and that the collapse of egypt must be postponed until some of the other messes in the vicinity has cleared up more or less.

    Rescuing Egypt for more than a few decades seems absolutely impossible. Even 5 years seems very difficult without significant degradation of their economy and consumption per capita.

  4. Sissyfuss on Sun, 6th Nov 2016 6:40 pm 

    I’m sure Business Insider sees this as an incredible investment opportunity from their perspective. They see money to be made in every catastrophe which Egypt surely is.

  5. peakyeast on Sun, 6th Nov 2016 6:46 pm 

    @Sissyfuss: But it IS… Just go all-in short options on Egypt. 😀

  6. orbit7er on Mon, 7th Nov 2016 7:09 am 

    Of course as pointed out in theOildrum.com during the initial Egyptian Crisis this is due to Egypt moving from an oil exporter to an oil importer. For years the US has given Egypt billions every year which was wasted on useless military weapons or boondoggles like the Cairo beltway highway instead of Green Transit, solar energy in the desert or desalinization powered by renewable energy. Saudi Arabia bailed out the military dictatorship after their coup with billions but now the Saudis are running out of cash due to the low oil prices. So as expected the Egyptian economic crisis is back. Egypt’s only Path forward would be redirecting all that military waste to Green Transit and renewable energy but that is very unlikely under the military dictatorship. Why capitalists believe they will get any reform from the military is hard to understand. So as I expected the democratic revolt will resume in Egypt as the military is no longer propped up by the Saudis…
    In the meantime the IMF, per usual, will squeeze them dry

  7. joe on Tue, 8th Nov 2016 8:15 am 

    They are just out of ideas. This has been going on for 200 years in egypt, and its always been about Suez, planes have helped but even now, its still cheaper to ship by Suez.
    Problem is that now the issues are growing beyond the control of weak western countries, the third world is growing, poor and angry, not a good mix if you are a weak wealthy socialist state that refuses to impliment even basic border control because you think theres a slight risk you might offend a NWO pillar like the EU or WTO.

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