Egypt beats Nigeria to relieve dollar shortage with devaluation

As crippling dollar shortage continues to pressure the local currency of Nigeria and other African countries, the Central Bank of Egypt made a bold move to slash the value of its currency to 8.85 pounds to the US dollar from the previous exchange rate of 7.73.

The Central Bank of Egypt, like that of Nigeria, faces the challenge of spending foreign reserves in effort to prop up the national currency.

After a prolong resistance, Egypt on Monday devalued its currency by 13 per cent and announced it would adopt “a flexible exchange rate” in a major policy change, aimed at relieving a crippling dollar shortage that is strangling the country’s already enfeebled economy.

Economists see the devaluation as a necessary step to boost Egypt’s competitiveness and bringing back foreign investors.

However, many Egyptians express concern the measure would cause a surge in prices. The country’s stock market jumps on announcement of more flexible currency policy.

The EGX-30 Benchmark index jumped by nearly 7 percent on the news, recording its biggest single day rise since July 2013. Similar to trends in Nigeria, Egypt’s foreign currency reserves have plunged by over 50 percent since 2011, but with the recent devaluation, its central bank is focusing on increasing reserves to $25 billion by the end of the year.

A short dollar supply has strangled businesses and restricted Egypt’s capacity to import essential goods. The Central Bank of Egypt, has a better foreign reserve position than Nigeria’s, sold $198m to commercial lenders at E£8.85 to the dollar, up from E£7.73, the rate for the past nine months.

In a statement the bank said it “will not hesitate to use all the tools and authority at its disposal to maintain order in the currency market and stability in price levels in the medium term”, suggesting there could be further changes to the rate.

“This is a good move and it is overdue,” said Simon Kitchen, a strategist for EFG-Hermes, the Cairo-based regional investment bank. “People will now want to see if it is the beginning of a series of reforms that can drive economic growth rather than a temporary move to reduce pressure.”

Egypt’s foreign currency reserves have tumbled from $36bn on the eve of the 2011 revolution to $16.5bn at the end of February, enough for just over three months of import cover.

A sharp drop in tourist arrivals after the downing by Isis of a Russian airliner in Sinai in November exacerbated the dollar crunch in recent months, threatening the country’s ability to pay for vital imports including medicines.

Currency restrictions imposed by the central bank to protect reserves and rationalise their allocation have squeezed local businesses, even forcing General Motors to suspend production for a week last month because it could not access dollars to pay for imported parts. Several foreign airlines complained in recent weeks that they could not repatriate funds back to their home countries.

Kitchen said investors will be looking to see more clarity on the currency and on other, deficit reduction measures, such as the introduction of a long-promised value added tax and further reductions to the country’s costly fuel and food subsidy regime.

“This is a great decision that will boost the economy and the stock exchange,” said Naguib Sawiris, the Egyptian telecoms tycoon who has recently acquired Beltone Financial, a local investment bank, and is buying another, CI Capital, to create the country’s second-largest investment bank in what is seen as a bet on the country’s economic recovery.

The overvalued currency and capital restrictions in place since 2011 have been blamed for discouraging foreign investment in Egypt.

Capital Economics, the London based Consultancy said in a note on Monday that “the pound has a bit further to fall” and that a level of E£9.50 to the dollar “would help to restore external competitiveness”. It added that the shift to a more flexible rate suggested that the currency was likely to “steadily depreciate in the coming weeks”.

It also warned that there would be some “short-term pain” in the shape of rising inflation that would erode real incomes and weigh on consumer spending.

Commercial International Bank, the country’s biggest private lender offered dollars to its customers on Monday at E£8.95.