Egypt’s latest devaluation rages on, converging on parallel rate

Egypt forged ahead with its latest currency devaluation after winning assurances on backing from the International Monetary Fund, with the pound roughly matching prices quoted in the black market.

The slide of over 10% against the dollar on Wednesday, the largest single-day drop since late October, is part of what authorities have pledged is a commitment to a more flexible currency regime. It appeared aimed at helping stamp out a parallel market that’s emerged amid Egypt’s worst foreign-exchange crunch in years.

The pound depreciated to a record and traded around 31.4 per dollar as of 12:48 p.m. in Cairo. That compares with the parallel exchange rate of slightly weaker than 31, according to traders.

The IMF on Tuesday laid out the details of a $3 billion rescue package to Egypt. It said the North African nation is moving toward a flexible foreign-exchange policy and any intervention by the central bank will be “guided” by the need to smooth out market volatility.

The fund warned, however, that the durability of Egypt’s policy shift “remains to be proven and the central bank may face political and social pressure to reverse course.” 

Foreign exchange remains scarce as the economy of the Middle East’s most populous country contends with the fallout from Russia’s invasion of Ukraine on the cost of commodities from food to fuel. Egypt needs to unlock more financing from abroad as it tries to clear the logjam of imports at its ports that’s adding to a backlog of unfulfilled demand for dollars. 

“The objective of the authorities should be to clear the FX overhang and ensure demand for FX is met in the official market, thereby unifying the exchange rate and eliminating the parallel market,” Farouk Soussa, an economist at Goldman Sachs Group Inc., said in a report.

Traders are hedging against the risk that the pound might depreciate further to around 35.4 per dollar in the next 12 months, according to the non-deliverable forwards market.

Egyptian stocks have gone on a bullish run since the latest round of devaluations began last October as investors saw an opportunity to capitalize on cheaper shares. The benchmark EGX 30 gauge soared as much as 4.4% in pound terms on Wednesday, the most in two months.

The move on Wednesday may be a sign that Egypt is shifting further toward a flexible exchange-rate policy backed by the IMF, though the extent of its commitment will only become clear in the days ahead. 

When Egypt devalued its currency twice last year, long stretches of stability in the pound followed bouts of depreciation.

The IMF said the central bank “may occasionally step in during times of excessive exchange rate volatility,” but “there will be no recourse to foreign-exchange interventions or the use of banks’ net foreign assets with the intent to stabilize or guarantee the level of the exchange rate.” 

Read: Egypt Needs ‘Critical’ Gulf Deals to Cover Funding Gap, IMF Says

The IMF estimates Egypt’s external financing gap at around $17 billion throughout the 46-month program, with the deal expected to unlock about $14 billion more from international and regional partners. Gulf allies also stepped in to shore up the finances of a country that’s seen as a regional linchpin. 

“The Egyptian pound will remain under pressure until more dollar inflows materialize, balancing foreign exchange demand and supply,” said Carla Slim, an economist at Standard Chartered Plc. “Closing the parallel market gap will likely drive the pound to overshoot before it stabilizes.” –BLOOMBERG