Assessing the currency: The pound comes under renewed scrutiny

The possibility of a major devaluation of the Egyptian pound has been a feature of any economic debate regarding Egypt’s currency position for some time. While the president has shown a determination to defend the currency, the toll this has taken on foreign reserves has made devaluation an inevitability in the eyes of many, even amidst renewed talks of a loan agreement with the IMF as of September 2012.

COMPARISONS: During summer 2012, the pound depreciated by only 1% against the dollar, backing up the president’s commitment to avoid a major devaluation or disorderly depreciation, and boosting investor confidence. This has not stopped discussion of potential future drops, however. Predicting the likely outcome of any given currency devaluation is an inexact science, and it is difficult to draw concrete conclusions from a comparison with other nations which have undergone devaluations in their recent history.

Egypt’s trade-deficit -to-GDP ratio of -11.2% in 2011 is worse than Mexico in 1994, Argentina in 2001 and all of the Asian states which suffered devaluations in 1997 with the exception of the Philippines. On the other hand, its import cover of 3.5 months at the beginning of 2012, despite its frequent appearance as a point of concern in the public discourse surrounding the economy, compares relatively well to some of the Asian and Latin American states which have devalued over the past 20 years or so. Mexico showed an import cover of just 0.84 months at the point of its devaluation, South Korea 1.43 months, Malaysia 2.72 months and the Philippines 2.1 months.

Further complicating any assessment of a post-devaluation Egypt is the unknown quantity of the country’s political risk. The long process of apparent political transformation that it is presently undergoing is unlike anything seen in the Asian and Latin American nations to which analysts are presently turning in their efforts to try to determine Egypt’s future economic path. The political uncertainty was a contributing factor to the failure of the government to secure a $4.8bn loan agreement with the IMF early in 2012, a move which is seen by many as the country’s last chance to avoid a devaluation. With the new president now in place, however, discussions with the IMF have re-started and a decision is expected by the end of the year.

However, despite the potential of external support and the effect this might have on preventing a devaluation, should a major fall materialise some consequences seem inevitable. A devalued currency would, for instance, bring rising inflation and, in a country where food price hikes can be a precursor to civil unrest, more fears regarding the nation’s political stability.

FACTORS TO CONSIDER: Moreover, the uptick in exports and decrease in imports which is often one of the benefits of a devaluation is unlikely to be seen in Egypt: much of the nation’s imports are essential goods, such as wheat and other basic food stuffs and fuel types that are already in short supply, for which there is no domestic production capacity. It is unlikely that the government will be in a position to increase subsidies on these basic goods – it is preoccupied with reducing state aid of this nature in a bid to tame the fiscal deficit. A decrease in the price of exports which might ordinarily be expected in a post-devaluation scenario will be mitigated by the fact that much of the merchandise Egypt ships overseas, such as plastic goods, are not 100% Egyptian-made, and is produced using components imported from other countries.

The periods of depreciation since Egypt began a managed float in 2000 have not resulted in an immediate increase in exports or economic growth, according to data published in the International Research Journal of Finance and Economics. The fact that most manufacturing segments, with the possible exceptions of clothing and food, are unlikely to benefit from a devaluation, means that few see it as a remedy to the country’s current economic challenges. While many hope that a return to political stability will support a stable pound, Egypt’s new government may still face an equally complicated economic scenario in 2013.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Egypt 2012

Economy chapter from The Report: Egypt 2012

Cover of The Report Egypt 2012

The Report

This article is from the Economy chapter of The Report: Egypt 2012. Explore other chapters from this report.