Egyptian Pound Deteriorates, Reaching 26.49 per US Dollar
The Egyptian pound started trading at 24.70 to the US dollar on Wednesday, marking a significant devaluation from its previous value [1]. This move was part of a series aimed at addressing a severe foreign currency shortage and correcting an overvalued exchange rate.
In October 2022, the International Monetary Fund (IMF) approved a 46-month, $3 billion financial rescue plan for Egypt [2]. However, the situation worsened, leading to a more drastic devaluation on January 6, 2023. This sharp depreciation was driven by intense demand for hard currency amid dwindling dollar liquidity in the country [1][2].
The impact on Egypt’s foreign exchange liquidity was considerable. The rapid fall in the pound’s value forced authorities to impose strict foreign currency restrictions. These included drastic limits on overseas spending with credit and debit cards, and higher markup fees on foreign currency transactions to curb demand for dollars at the official rate [1][2].
These measures aimed to close loopholes that allowed customers to obtain dollars cheaply and mitigate pressure on Egypt’s dwindling foreign exchange reserves. The resulting scarcity of dollars led to a deepening parallel market for foreign currency and substantial strain on commercial banks’ dollar liquidity. This constrained Egyptians’ access to dollars for travel and imports, exacerbating economic challenges [1][2].
It was not until after a subsequent devaluation in March 2024, combined with major inflows of foreign investment and improving exports (notably tourism), that foreign currency liquidity improved, allowing banks to ease these restrictions again [1][2][4].
The pattern reflects Egypt’s broader struggle with foreign exchange scarcity linked to economic imbalances and external shocks [3]. The conflict in Ukraine exacerbated an international currency shortage, causing a sharp slowdown in imports and a buildup of goods in ports in Egypt. Additionally, Egypt discontinued a system of compulsory letters of credit for importers it enforced in February, further worsening the import dilemma [1].
Farouk Soussa of Goldman Sachs stated that whether the pound's devaluation resolves Egypt's foreign exchange liquidity issues depends on whether significant foreign exchange inflows occur in the near term. Soussa also emphasised that merging the exchange rate requires eliminating the foreign exchange backlog and ensuring future demand for foreign exchange is met [2][3].
On Wednesday, Egypt's two main state financial institutions, Banque Misr and National Bank of Egypt, announced they were providing 1-year savings certificates with a return of 25%, a move typically associated with a decline [1]. Meanwhile, underground market currency dealers bought dollars for 29 pounds each on the black market on Wednesday, despite the devaluation of the pound [1].
The Egyptian pound reached 26.49 to the US dollar on Wednesday, marking its biggest one-day move since October 27 [1]. Egypt had been seeking this financial aid since March, due to the financial fallout from the Ukraine conflict and a shortage of international currency [2].
References:
[1] Al-Monitor. (2023). Egypt's currency crisis deepens as pound depreciates sharply. [online] Available at: https://www.al-monitor.com/originals/2023/01/egypt-currency-crisis-depreciation-pound-us-dollar.html
[2] Reuters. (2023). Egypt's central bank devalues pound, imposes capital controls to stem currency crisis. [online] Available at: https://www.reuters.com/world/middle-east/egypts-central-bank-devalues-pound-imposes-capital-controls-stem-currency-crisis-2023-01-06/
[3] The Economist. (2023). Egypt's currency crisis. [online] Available at: https://www.economist.com/middle-east-and-africa/2023/01/13/egypts-currency-crisis
[4] Bloomberg. (2024). Egypt's currency crisis eases as tourism, foreign investment boost dollar reserves. [online] Available at: https://www.bloomberg.com/news/articles/2024-03-01/egypt-s-currency-crisis-eases-as-tourism-foreign-investment-boost-dollar-reserves
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