In January 2023, the US dollar (USD) experienced a remarkable upswing against the Egyptian pound (EGP), reaching unprecedented heights.
This surge marked a pivotal moment in the currency exchange landscape, and since then, the USD has maintained its elevated position, remaining steadfast against the EGP in the months that followed.
At the time of writing on September 21, USD/EGP was sitting at 30.85, up around 25% since the start of 2023.
Why is EGP under pressure?
The challenges for EGP come amid a significant economic crisis in Egypt, with recent reports suggesting the national currency remains overvalued, despite its sluggish performance against the USD. Notably, a potential delay in the genuine adoption of a flexible exchange rate would raise the risk of a sovereign default, according to the think tank Capital Economics.
The country’s external position has deteriorated further in recent months as its short-term external debt, which sits at an estimated $30.2 billion, accounts for as much as 90% of Egypt’s total foreign reserves.
“The elephant in the room remains the pound. It is almost a year since the CBE pledged to adopt a flexible exchange rate, but since January the currency has been de-facto pegged to the dollar.”– Capital Economics stated in a briefing last week.
Capital’s research report also referred to growing speculations that the Egyptian government does not plan to devalue the pound until the presidential elections are wrapped up. There is no official date for the poll, though reports indicated it might take place in December.
Capital Economics said Egypt’s government is “playing a dangerous game” by refusing to devalue the currency, which continues to lose value on the market.
Analysts expect further declines in EGP
In addition to the above, the Egyptian pound is expected to continue on its downward trajectory against the US dollar throughout the remainder of the year.
In particular, panelists at FocusEconomics believe EGP could end the 2023 calendar year at 34.69, indicating a possible downside of more than 12% from its current value.
Meanwhile, headline and core inflation in Egypt gained traction over recent months, hitting record levels in June and July, respectively.
The uptick in inflation came in part due to EGP’s rapid depreciation against the dollar, and a deficit of foreign currency.
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