#forex 1. The official currency of Egypt is the Egyptian Pound. It is abbreviated as EGP. 2. The 2011 revolution pushed Egypt into a political turmoil. It had around $36 billion in its forex reserves at that time. Social unrest started to keep foreigners away from its scenic locations and industry. Flight bans from many European nations after the aircraft accident in October 2015 made the situation worse. The main sources of foreign currency for Egypt are inward remittances from its citizens working abroad (Libya, Saudi Arabia, Kuwait, Jordan, etc) , exports, tourism, FDI and suez canal revenues. 3. By selling dollars and putting restrictions on rates, the central bank had tried to keep the value of the pound strong. But, it couldn’t do this for long. The weekly supply of dollars from the central bank was not enough for corporations. This shortage of dollars for businesses at official banking sources created a black market for currency in Egypt. Importers bought dollars from this unofficial market, at a difference as high as 100% seen in October 2016\. Those working abroad also started to use these channels to send money home due to attractive rates. This created further shortage of foreign currency. Egypt then started to impose severe capital controls to save whatever little reserves it had. 4. It limited transfers of dollars abroad. But it back-fired and angered the industry. 5. Local manufacturers couldn’t import inputs like raw materials. Foreign firms couldn’t convert/remit pounds to their home currency. FDI fell as a response to this measure and Egypt started to lose a source of “stable money” too. Egypt now was in a vicious cycle. As if this was not enough, oil prices started to fall. Its neighbours started to reel under financial trouble. Cheap oil made the sea route around Africa profitable for ships on Europe-Asia route as they could avoid the “transit fees” for Suez Canal. The end result? By October 2016, forex reserves fell to $19 billion and the current account deficit jumped to a high of 5.3% July 2016\. 6. Hopes of devaluation began to get stronger from July 2016\. Those having dollars were not selling them in hope of a higher rate (weaker pound). Remittances were delayed. ## November 3, 2016: 1. It was 3 November 2016, when the Central Bank of Egypt announced that it had devalued the pound by 32.5% against the US dollar and allowed Egyptian Pound to fully float. The official exchange rate was set at USDEGP \=13, up from around nine. The bank withdrew restrictions on deciding own buy and sell rates by banks. The priority import-list was scrapped. To avoid panic, the central bank said there would be no restrictions in depositing or withdrawing foreign currency. Banks were allowed to remain open until 9 pm and on weekends to transact foreign currency. The next auction of foreign exchange by CBE resulted in a weighted average exchange rate of USDEGP=14.64. Just a day before devaluation, USDEGP fell sharply in black market as hoarders/speculators began selling their dollars anticipating this move by central bank 2. Devaluation can occur when full flexibility in rate is allowed by a central bank or when it still fix rates at a lower point. Economists believe the former case to be most effective. 3. **Funding from IMF:** 4. On 11th November, 2016, IMF then approved the biggest ever financial bailout for a middle east country. This was very much needed for Egypt’s forex reserves. The country received a total of USD12 bn over a period of three years in return for the series of economic reforms. The measure was enough to boost the sentiments of the local financial market. As part of deal with IMF, govt would introduce reforms like devaluation, rate hikes, introduction of a value added tax, cuts in subsidies on several items. The reforms were aimed at overvalued pound, black market, scarcity of foreign currency, low forex reserves, large govt deficits and high debt. 5. The [Report](https://www.brookings.edu/research/egypts-imf-program-assessing-the-political-economy-challenges/)- Egypt’s IMF program: Assessing the political economy challenges by Bessma Momani - mentions the conditions of the IMF's 2016 loan to Egypt. ## The Fallout 1. To arrest the slide in value of pound and the resulting inflation, the central bank had to tighten its monetary policy. This would mean a number of measures. It increased the interest rate by 300 basis points. 1 basis point is 0.01%. It also “removed” surplus liquidity in the banking system by announcing deposit auctions, where it removed liquidity of EGP 38.8 bn at an average rate of 17.5%. Financing of public deficit by the central bank would end so that new liquidity does not enter into the economy. Companies delayed investments as they won’t risk borrowing at high costs. 2. If private sector investments are absent for a longer period due to high interest rates, unemployment can get worse. 3. Weaker pound also made imports of several essential items costlier, including fuel, medicines, and food items. To comply with IMF terms to reduce govt. spending, Egypt rolled back subsidies on fuel, price of which rose by as much as 50% in June, 2017. Thus, devaluation increased the cost of living for ordinary citizens. 4. Production costs for manufacturers rose as many inputs were imported. Pain of ordinary citizens took the form of a social backlash against the Sisi’s government. Travelling abroad became tough, overseas study cost rose, and luxury items went off the shelf. Corporates that borrowed abroad were faced with high debt burden. Inflation in Egypt remained above 30 percent for much of 2017\. 5. Thus, rising inflation and borrowing costs were the immediate fallout of the crisis. ## The Gains 1. As soon as currency was floated, it hit an all-time low of 19.62 vs $ in December 2016\. The opening up of the economy by allowing the pound to freely float helped to boost the confidence of investors. Devaluation helped foreign investors receive more pounds for their currency to invest in various fields. 2. However, just a market-determined currency would not be sufficient to attract investors. With a promise of better use of public funds, accountability, broad-based regulatory reforms and doing away with rampant corruption and cronyism, Egypt could now attract capital and bring an end to years of currency shortage. The country’s stock exchange hit a high of 5 years. A 3-year lift on capital gains tax on stocks with privatisation of several state-owned companies was announced. 3. Exports increased slightly as weaker currency made goods and services more competitive at global level. Devaluation reduced consumption of imported items as their prices in local currency increased. Egypt is heavily dependent on imports of food items and raw materials for its industry. This created a huge opportunity for local manufacturers to offer affordable and locally produced substitutes. The combination of the two helped Egypt reduce the current account deficit. 4. As bulk of forex transactions now started to happen in the official market versus black market, companies now enjoyed the benefit of forex losses. Transactions from black market couldn’t be much adjusted for expenses in taxation due to lack of proof. Businesses could now rely on a banking system for their currency needs, rather than a non-transparent black market that was highly unreliable. 5. Yields on Egyptian assets rose. ## Efforts by MoF and CBE to shore up the country's forex reserves 1. As part of the condition to secure help from IMF, Egypt was asked to raise $6 billion from the market, which it received from UAE, China, and the G7. On Nov. 10, 2016, MoF issued bonds worth USD4bn on the stock exchange of Ireland to help CBE and narrow its own fiscal deficit. CBE used part of the funds as collateral and on the same day raised USD2bn through a one-year repo transaction with international banks. Thus, an extra USD2bn was added to the forex kitty. 2. After a 300‑basis‑point increase in interest rates, the yield on Egyptian Treasury bills has reached 20.5%. This presented a situation of a very high domestic borrowing cost. Hence, to reduce the cost of interest payments, Egypt decided to issue dollar denominated bonds to boost public finance. At that time, interest payments on sovereign bonds made up around ⅓ of the country's budget. In Dec. 2016, China and Egypt agreed on a swap deal worth USD 2.7bn. The swap would help Egyptian importers get yuan directly and not rely on purchasing dollars to pay for chinese imports. In Jan. 2017, it sold USD4BN of eurobonds. In 2019-2020, it decided to tap yen and yuan bonds after borrowing $13bn since Nov. 2016 in foreign denominated debt. 3. By the end of October 2017, forex reserves swelled to $36 bn ## Few years later 1. By October 2019, EGP had hit 16.10 against USD, the strongest level since April 2017\. This was due to sharp inflow of foreign exchange. The demand for local currency was for investments in egyptian bonds, the growing tourism sector and sending money home by workers abroad. The rising pound also helped Egypt to achieve lower inflation due to falling cost of imported goods. Inflation by September 2019 hit a low of seven years. Cheaper imports was expected to further boost consumption ## References: 1. Momani, Bessma. (2018, January). *Egypt’s IMF program: Assessing the political economy challenges*. Brookings. [Link](https://www.brookings.edu/articles/egypts-imf-program-assessing-the-political-economy-challenges) 2. IMF. (2017, January). *Arab Republic of Egypt-Request for extended arrangement under the extended fund facility*. [Link](https://drive.google.com/file/d/1UhUhWLF9nx1IqSTwrvLdmGJCkLdf40Hu/view?usp=drive_link) 3. [https://www.reuters.com/article/egypt-currency-blackmarket-idUSL8N1AB39R](https://www.reuters.com/article/egypt-currency-blackmarket-idUSL8N1AB39R) 4. [https://www.pwc.com/m1/en/publications/the-egp-devaluation-a-new-beginning.html\#background](https://www.pwc.com/m1/en/publications/the-egp-devaluation-a-new-beginning.html#background) 5. [http://eprints.ugd.edu.mk/20695/](http://eprints.ugd.edu.mk/20695/) 6. [https://infomineo.com/egyptian-devaluation-one-year-later/](https://infomineo.com/egyptian-devaluation-one-year-later/) 7. [https://www.albawaba.com/business/egypt-get-26b-cash-injection-chinese-currency-swap-deal-912568](https://www.albawaba.com/business/egypt-get-26b-cash-injection-chinese-currency-swap-deal-912568)