Carla Slim, MENA economist at Standard Chartered (screen capture from the Bloomberg Daybreak interview)
Carla Slim, MENA economist at Standard Chartered (screen capture from the Bloomberg Daybreak interview)


EGP Expected to See Another Devaluation as Policymakers Run Out of Options: Analyst

31/07/2022

The Egyptian pound could see another significant devaluation as the Central Bank of Egypt (CBE) tries to dodge further pressure on the country's net foreign exchange (FX) reserves, Carla Slim, MENA economist at Standard Chartered, said in a Bloomberg Daybreak interview on Friday.

"By choice, perhaps the authorities would like to avoid such a large devaluation because it only contributes further to more headline inflation, but if we look by the fundamentals, there might not be any other choice but to devalue at this current juncture to reduce the pressure [on net foreign assets]," said Slim.

In the wake of the Russo-Ukrainian war, Egypt devalued the pound by 16 percent in March 2022.

Slim explained that the net foreign asset position of local banks and the central bank -- an indicator monitored closely by Standard Chartered for Egypt, beyond just the FX reserves -- currently looks as negative as it was in 2016 when Egypt devalued the currency and embarked on its first International Monetary Fund (IMF) program.

In November 2016, Egypt secured a three-year $12 billion loan program with the IMF, which entailed some austere economic reforms, including currency floatation, cutting energy subsidies and introducing value-added tax (VAT).

The coming devaluation of the pound is likely to be delayed until Egypt reaches an agreement with the IMF on the new loan program, Slim said, adding that she expects the agreement not to be reached before the end of the third quarter this year.

The IMF announced in March that Egypt had requested support to implement a comprehensive economic program, but the size of the new financial package was not disclosed.

Last week, the IMF said Egypt still needs to make "decisive progress" on fiscal and structural reforms to boost the economy's resilience.

Slim noted that the market interpreted the IMF statement as a further delay in the IMF program.

Egypt would be risking jeopardizing its fiscal space if devaluation continued to be avoided, she said.

"We think at the moment the negotiations with the IMF are not just about the FX adjustment and the devaluation. It's also about what's going to basically be sacrificed from the fiscal space as well," she said.