Egyptian pound depreciates to 26.49 per U.S. dollar.
Egypt has taken a significant step in addressing its foreign exchange liquidity issues by discontinuing a system of compulsory letters of credit for importers, a move that was announced last week. This decision comes as the country grapples with a severe shortage of international currency, leading to a sharp slowdown in imports.
The Egyptian pound has been under pressure, with its value deteriorating from 19.7 to the US dollar in March. On Wednesday, the Egyptian pound weakened further, reaching 26.49 to the US dollar, marking its largest one-day move since October 27. Despite this devaluation, underground market currency dealers were still buying US dollars for 29 pounds each on the black market on Wednesday.
The devaluation of the Egyptian pound was part of a broader move to address severe foreign exchange liquidity shortages, external financing constraints, and persistent balance of payments pressures. The International Monetary Fund (IMF) approved a 46-month, $3 billion financial rescue plan for Egypt in October, which was essential for the country due to its lack of currency liquidity.
Egypt has been facing currency liquidity issues due to a combination of factors. The country has experienced a sharp decline in foreign currency inflows due to reduced tourism, disruptions in global agricultural commodity supplies, export bans by key exporters, and high energy prices raising import costs. Without an IMF agreement and amid rising regional tensions, Egypt struggled to finance its external debt obligations, leading to increasing pressure on reserves and forcing a drastic currency adjustment to stabilize the situation.
The key to addressing Egypt's currency issues is to align the exchange rate, which will require clearing the foreign exchange backlog and ensuring demand for foreign exchange is met going forward. Egyptian officials hope that a competitive exchange rate will revive tourism and other dollar-earning sectors, partially mitigating the foreign currency crunch.
However, the devaluation of the Egyptian pound has implications for the country's economy and foreign exchange liquidity. The weaker pound enhances export competitiveness and makes imports more expensive, which may support GDP growth over time but also contributes to inflationary pressures. Inflation surged—reaching above 35% in 2023—with food prices rising over 70%, reducing consumers' real incomes and forcing spending prioritization on basics.
The foreign currency shortage led to import reductions and disruptions in commodity supply chains, further straining economic activity and food security. The depreciation increased the cost of servicing foreign-currency-denominated debt, pushing interest payments closer to unsustainable levels, complicating fiscal management.
The Central Bank has enforced tighter foreign currency transaction controls to manage limited reserves, which has negatively affected business activity given Egypt’s import dependency. The country’s recovery depends heavily on restoring foreign exchange inflows through tourism, foreign investment, and external support combined with structural reforms.
Farouk Soussa of Goldman Sachs stated that the resolution of Egypt's foreign exchange liquidity issues will depend on the inflow of significant foreign exchange in the near term. Egypt has been seeking this lending since March, due to a financial crisis caused by the fallout from the Ukraine conflict and a shortage of international currency.
- The resolution of Egypt's foreign exchange liquidity issues may be facilitated by attracting significant investments from the banking-and-insurance industry, as foreign investments can help to increase the inflow of foreign exchange.
- The devaluation of the Egyptian pound, coupled with efforts to address foreign exchange liquidity issues, has implications for the finance sector, as the increasing cost of servicing foreign-currency-denominated debt could complicate fiscal management and interest payments.
