The Egyptian central bank’s decision to devalue the pound this month ended months of growing speculation that a move in the currency was on the cards. In the near term, this will bring some pain. The central bank has already jacked up interest rates in an effort to contain the impact on inflation. What’s more, since the Egyptian economy as a whole has larger FX liabilities than assets, its overall balance sheet will have deteriorated as a result of the weaker pound. Nonetheless, we think the devaluation sets the foundations for stronger growth further ahead. It will boost the competitiveness of exports. Foreign investors, who had shied away in part because of expectations of devaluation, may return. And finally, the weaker currency should improve the country’s balance of payments position, allowing the central bank to dismantle FX restrictions which have been disrupting activity.
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