Question

The Egyptian Pound (EGP) went through some volatility since it was floated in November 2016 until today. This could be broken down in 4 main phases as follows:

Phase 1: From floatation till June 2018

Phase 2: From June 2018 – December 2018

Phase 3: From January 2019 – February 2020

Phase 4: Coronavirus worldwide outbreak

Required:

1. Analyze what happened during each of the above 4 phases and explain in full details how these factors impacted the EGP exchange rate versus the Dollar.

• What made the EGP appreciate / depreciate. Your analysis should be based on how the BOP components impacted the exchange rate.
• What actions (if any) were taken by the Central Bank of Egypt in response to these market changes. What was the intended outcome which made CBE take such actions?
• What major actions related to interest rates on EGP saving instruments were taken by the largest public sector banks (National Bank of Egypt and Banque Misr). Why do you think these actions were taken?

2. What do you think will happen to the EGP exchange rate against the Dollar by end of 2020? (EGP will appreciate / Depreciate or remain the same at the current level of US$ / EGP 15.7). Justify your expectation based on the BOP components analysis.

Answer 1

Phase 1

Egyptian pound replaced the Egyptian piastre in 1834. Egypt changed the valuation of the pound and pegged it to the USD. The Egyptian pound was devalued with the USD in 1973 and by itself in 1978. From that point, the pound had a FLOATING EXCHANGE RATE.

Seeing the value of the EGP fall, the central bank of Egypt stepped in and began a managed float in 2001. The managed float continued untill 2016 when the bank decided in favour of allowing the currency to float freely again. With this decision, the value of the currency plummeted. After the cenral bank's decision to float the currency, the pound devalued by 32.3% and continued to lose value. Also, the bank raised interest rates by 300 basis points to stem the expected inflation. The IMF required the devaluation of the EGP as a condition for Egypt to receive a $12 billion loan.

Before float 1$= 8.8 EGP pounds, whereas after this action with the unpegging, 1$=15 EGP pounds.

The 2011 revolution caused economic hardship in Eqypt, resulting in foreign currency shortages as the country witnessed a flight of capital due to security issues as well as labour and social unrest. The consequent effects can largely be attributed to the already fragile Egyptian economy. Although it was growing at rates of 5% & 6% annually pre-revolution this growth was not strong enough to establish a sound economic base. Whilst on the brink of the revolution, the country was already suffering from 9% unemployment and the government footed a large subsidy bill ranging between 12.2% and 8.5% of GDP between 2008 and 2010, which mainly consisted of energy and food subsidies.

Egypt main sources of foreign currency are Exports, remittances, tourism, FDI & Suez canal fees. All of these sources have suffered due to palpable uncertainity following the 2011 revolution.

As an example of the continued deterioration of the EGP's value, as of May 2018, the exchange rate was 17.6 Egyptian pounds to every dollar.

Phase 2

EGP have been going through tough times due to high inflation , prices are rising and the devaluation of the currency hace all squeezed living standards.

Phase 3

The Egyptian pound has continued to rise against the US dollar. The $ fell below 17 EGP to hit 16.86 for the first time in two years. The US $ is continuing its downturn against the Egyptian pound. After two years of its price swinging around EGP 18, on 29th May 2019 it fell below EGP 17 to hit 18.86. Economic experts put the drop in the dollar against the Egyptian pound down to various reasons. Foreign investment has started to return to the Egyptian market and the tourism sector has seen a jump. Meanwhile Egypt has maintained its pace of economic reforms, pushing its growth well above the regional average. "Since the beginning of 2019, the US dollar had lost more than one pound in the local market. the main reason for that loss is the foreign investments that started to flow into the Egyptian market again through treasury bills and bonds that Egypt offers to finance the budget deficit". Also Egypt sources of foreign currency are recovering like tourism and transfers from Egyptian expats and Suez canal revenues. So the inflation rate in Jan 2020 was 7.2% and Feb 2020 was 5.6% before corona outbreak.

Phase 4

Egp pound will have impact on the currency due to no economic trades, and restriction on tourism , stability of currency. The main source of income will have adverse effect. Borrowing from IMF also will be difficult due to global economy is suffering which will not be positive for borrowing money from IMF. Suspension of flights by some countries is also expected to decrease in tourist flow to Egypt which in turn will lead to foreign currency scarcity. In March 2020 the price of US dollar against the EGP went up in local banks at an average three piasters higher compared to monday's price. Wars over oil and the OPEC cutting oil output have cheapened oil prices globally, thereby savng foreign currency for countries that import huge amounts of fuel and consequently decreasing the budget deficit.

In Jan 2020 1$= 15.791 EGP vs in April 1$= 15.743EGP shows no much decline in currency rate. As the global economy is suffering with Corona pandemic. Since US economy has been suffering with huge number of positive corona cases which definately has adverse impact on US economy.

Conclusion

Once the Flights starts operating, and the normal operations resume will have increased tourism and normal flow of income for the Eqyptian economy.

Based on Balance of payments components EGP currency will see appreciation in the currency