The gap between the official rate of the Egyptian pound against the dollar and its price in the parallel market has widened, putting pressure on Egypt ahead of an important meeting of the board of the International Monetary Fund next week.
Hard currency deficit persists in Egypt, despite the double devaluation of the Egyptian pound this year.
On December 16, the IMF is expected to consider Egypt’s request for an extended $3 billion credit line to support its public finances. Egypt and the Fund announced the agreement on a funding package on October 27 at the expert level.
Ahmed Kujuk, assistant finance minister, said Wednesday he expects the IMF board to approve the package at its meeting.
When Egypt announced the peg-level agreement, it said it had moved to a “permanently flexible system of exchange in which supply and demand factors determine the value of the Egyptian pound against other foreign currencies.”
In a statement released by the Council of Ministers today, Friday, Kujuk confirmed that the agreement with the IMF aims to achieve a flexible exchange rate.
Black market traders sell dollars at £32 and £33, compared to the official rate of about £24.6 to the dollar.
The widening gap between the official exchange rate and that of the parallel market has prompted many analysts to say that Egypt may let the pound fall again ahead of the IMF meeting, as well as raise interest rates.
“We think we will see another decline or correction, but we do not expect a decline to the level of 32-34, as suggested by the London Stock Exchange or the black market,” said Arqaam Capital’s Jap Meagher.
On October 27, the pound fell 14.5% against the dollar. Since the beginning of November, the central bank has allowed the official exchange rate to decline gradually, averaging around 0.01 pounds a day.
A number of analysts said the pound has weakened enough in line with their various fair value models, but a period of adjustment may be needed to resolve the import lag and be confident it will bounce back.
“The latest devaluation brought it to fair value,” said Charles Robertson of Renaissance Capital.
The Egyptian Ministry of Finance had expected a short period of inflation following the move to exchange rate flexibility, saying that this is what happened after the previous wave of exchange rate liberalization in November 2016.