Egypt: fresh devaluation on the way

Speculation has mounted in recent weeks that the Egyptian pound could be on the cusp of (another) devaluation. The initial rumours were sparked by the central bank governor, Tarek Amer, who suggested that his predecessors’ decision to keep the pound stable was a “grave mistake”. We agree with that view. The central bank’s determination over the past five years to maintain an overvalued currency peg weighed on exports, deterred foreign investors and forced the authorities to rely on draconian FX restrictions, all of which held back economic growth. March’s devaluation of the currency went some way to improving the pound’s competitiveness, but we think it needs to fall further. The latest comments from policymakers suggest that it is a question of when, not if, the currency will be allowed to weaken. Ultimately, we think the pound is likely to fall beyond 10/$ by next year from 8.88/$ at present.