Egypt backs flexible pound amid devaluation calls, IMF talks

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Egypt’s government now favors a more flexible currency to support an economy that’s come under pressure from Russia’s invasion of Ukraine, a top official said.

Authorities already allowed the pound, which had been kept stable against the dollar for about two years, to weaken sharply in March, but investors and economists think it has much further to go to reflect its true value.

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Egypt’s currency is down more than 18 percent so far this year.

Investors are bracing for a second wave of depreciation while the government is in talks for a new loan from the International Monetary Fund, which favors a more flexible exchange rate.

Asked on Tuesday about calls for a deeper devaluation, Hala Elsaid, Egypt’s planning minister, signaled openness to looser management of the currency.

“We as a government do agree that a flexible exchange rate is definitely good for the economy,” Elsaid, who’s also chairwoman of Egypt’s sovereign wealth fund, told Bloomberg Television in an interview.

The Arab world’s most populous nation is racing to buttress the economy after the war in Ukraine sent Egypt’s food and fuel import bills soaring and helped spur an exodus of foreign portfolio investors from the local debt market.

It’s a reversal of fortune for the one-time darling of emerging markets. Drawn to Egypt’s high interest rates, a stable pound and its track record of market-friendly moves, foreigners had pumped billions of dollars into its debt market.

A leadership shakeup at the central bank last month only served to spur speculation about the currency outlook after the replacement of Tarek Amer, who’d been governor for about seven years and was seen as supportive of a stable pound.

‘Large and Ambitious’

“A large and ambitious IMF program is needed,” Bank of America Corp. economist Jean-Michel Saliba said in a report published on Tuesday. “We assume Egypt shifts to a flexible FX regime within an IMF program.”

BofA estimates Egypt’s gross external funding needs for the full year of 2023 at $58 billion, or about 14 percent of gross domestic product, and said it assumes the government can secure a $15 billion extended fund facility program from the IMF for three years.

“Large external funding needs call for flexible dollar/pound,” Saliba said. “A flexible dollar/pound is key to help the current-account deficit compress over the coming period.”

Finance Minister Mohamed Maait has previously said that Egypt is asking for “definitely less than $15 billion.”

Elsaid said “the government is working very hard to increase our foreign exchange receipts by means of an effort to boost exports, foreign direct investment and remittances from abroad.”

Help has also come in the form of more than $22 billion in deposits and investment pledges from its energy-rich Arabian Gulf allies.

Abu Dhabi wealth fund ADQ and a unit of Saudi Arabia’s Public Investment Fund have so far pumped roughly $3 billion into the country, snapping up government-held stakes in prominent companies in deals facilitated by the Egyptian sovereign fund.

More such agreements are expected, possibly including the landmark sale of stakes in some firms held by Egypt’s army. The government is also promising new policies on state ownership, limiting its involvement in some areas and exiting others, as it seeks large-scale investment from private enterprise.

Elsaid said Egypt has set up a “pre-IPO fund,” with the aim of holding public stakes and working with strategic investors ahead of public offerings.

Egypt will revisit its forecasts for the economy by next month to account for shocks from abroad, she said.

The country has recently benefited from improvements in FDI and exports, according to Elsaid.

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