The Central Bank of Egypt (CBE) stabilised the exchange rate of the US dollar against the Egyptian pound on Tuesday, in a move that contradicts the expectations of many analysts.
This decision has raised serious confusion in the market, especially among holders of US dollar and those who bought dollars at high prices in the past few days hoping that the CBE would further devalue the pound.
Many analysts expected that the CBE would reduce the value of the pound following CBE Governor Tarek Amer’s recent remarks in which he said that the CBE had been mistaken to defend the pound over the past few years.
The dollar jumped Tuesday to EGP 11.40 on the informal market, driven by the increased speculation.
Osama El-Menilawy, assistant general manager of the financial sector at a private bank operating in Egypt, said analysts and exchange market officials predicted an 80% likelihood that the Egyptian pound would be devalued, until the inflation indicators were announced on Sunday 10 July.
The indicators showed that there was a remarkable increase in inflation rates and expectations for a further increase in the coming period. Therefore, the likelihood of a reduction in the value of the Egyptian pound was lowered to 50% by analysts.
El-Menilawy noted that analysts disagreed about whether the CBE would devaluate the pound on Tuesday or would delay it; however, most of their expectations—following the release of the inflation indicators—tended towards non-reduction, which is what actually occurred.
A further devaluation of the pound is coming, he said, but inflation and the government direction to increase prices are worsening Egyptians’ standard of living, so the decision will be delayed until the end of 2016.
A government source noted on Monday that the government may cancel its subsidy of petroleum and electricity products, activate the value-added tax, and increase the tax on cigarettes in order to reduce the budget deficit and reduce the aggravation of public debt.
The CBE devaluated the Egyptian pound in mid-March by roughly 112 piastres against the US dollar, which brought the US dollar’s price to EGP 8.85. It was then increased by 7 piastres the following day to settle the price of the dollar officially at EGP 8.78.