The Egyptian currency experiences a slowdown, now valued at 26.49 per U.S. dollar
Egyptian Pound Devalued Amid Foreign Exchange Shortage
The Egyptian pound was devalued to approximately 26.49 to the U.S. dollar on January 6, 2023, in response to severe foreign exchange shortages and persistent external financing pressures.
Background
Prior to the devaluation, the pound was trading at 24.70 to the dollar at the opening of the trading day. The financial fallout from the Ukraine conflict and an international currency shortage had been putting pressure on Egypt's economy since March, leading the country to seek a $3 billion financial rescue plan from the International Monetary Fund (IMF) in October.
Causes of the Devaluation
The devaluation was primarily driven by a foreign currency crunch, as Egypt relies heavily on imports, including critical agricultural goods like wheat, and on tourism for U.S. dollar inflows. The drop in tourism (especially from Russia and Ukraine) and rising import costs amid global supply disruptions reduced foreign currency availability.
Additionally, Egypt faced a growing external financing gap as external debt amortizations came due, with international creditors requiring reforms before extending more aid. Delayed agreements with the IMF intensified the shortage of foreign currency. Lastly, the exchange rate adjustments aimed to realign the currency with market fundamentals by making exports cheaper and imports more expensive, thereby improving the trade balance.
Implications for Egypt’s Economy and Foreign Exchange Liquidity
The weaker pound can boost Egypt’s export sector by making goods cheaper abroad, potentially aiding economic growth in the medium term as reported by economists. However, the devaluation pushed up import prices sharply, contributing to very high inflation (around 35.6% annually as of late 2023), particularly in food prices, eroding households’ purchasing power and hurting living standards.
Despite the devaluation, the foreign currency shortage persisted, causing import slowdowns and backlogs at ports. This strained businesses reliant on dollar liquidity and limited availability of essential goods. The currency depreciation increased the local-currency cost of servicing foreign-denominated debt, boosting the interest burden on government finances, with estimates as high as 70% of government revenue in 2023, threatening fiscal sustainability.
Future Outlook
Farouk Soussa of Goldman Sachs stated that whether the Egyptian pound's devaluation resolves the foreign exchange (FX) liquidity issues will depend on whether significant FX inflows occur in the near term. He also mentioned that merging the exchange rate is key, which requires removing the FX backlog and ensuring demand for FX is met going forward.
The devaluation of the Egyptian pound marks a significant step in addressing the country's foreign exchange shortage, but ongoing challenges in foreign exchange liquidity and the need for structural reforms to restore economic stability remain. Egypt's government faces increasing pressure to implement IMF-mandated reforms to secure further international support and stabilize foreign currency availability.
- The devaluation of the Egyptian pound, primarily driven by a foreign currency crunch in the banking and insurance sector, will likely require significant inflows of foreign currency to alleviate the industry's financing pressures and improve its liquidity.
- The rising inflation and persisting foreign exchange shortage in the finance sector, exacerbated by the devaluation of the Egyptian pound, underscore the need for reforms in the banking-and-insurance industry to stabilize the economy and secure further international support.
