Egypt is drafting its next budget on the basis of an exchange rate of 8.25 Egyptian pounds to the dollar, weaker than the central bank’s official rate, two government sources said yesterday, indicating the monetary authority may be preparing to devalue.
The bank has defended the pound against growing pressure to devalue, but with foreign exchange reserves scarcely enough to finance more than three months worth of imports, economists say it cannot hold out forever.
To keep the pound at an artificially high rate, the central bank has introduced strict currency controls, making it difficult for firms to obtain the dollars they need to finance imports. The crisis has hit trade and manufacturing, as factories struggle to bring in components, and could threaten growth.
But the exchange rate being assumed in early drafts of the 2016-17 budget suggests the central bank could be planning to abandon the rate of 7.7301 before the end of June.
Egypt’s fiscal year begins in July.
“The government has begun preparing the state budget in accordance to an exchange rate of 8.25 Egyptian pounds to the dollar versus 7.75 pounds in the 2015-2016 proposed budget,” one of the government sources told Reuters.
The Finance Ministry said in a statement that it takes into account a number of factors when deciding on which exchange rate to assume when drafting the budget and that the rate is often revised during the drafting process.
“The Egyptian central bank is not involved in deciding these assumptions,” the statement said, adding that the central bank was independent.
The central bank could not immediately be reached for comment.
Egypt has been struggling to obtain enough foreign currency since a popular uprising in 2011 ended Hosni Mubarak’s 30-year rule and drove away tourists and foreign investors—both major sources of foreign currency.
Its foreign currency reserves have tumbled to $16.48bn in January from $36bn before the uprising, and the country has been rationing dollars through regular auctions to banks.
Under former governor Hisham Ramez, Egypt’s central bank allowed the pound to weaken by more than 10% between January and October last year through a series of gradual moves.
But with other emerging markets currencies falling dramatically against the greenback during last year’s rout, the Egyptian pound was still left looking relatively overvalued.
New governor Tarek Amer took the helm in November and surprised markets by strengthening the currency by 20 piasters against the dollar.
Some economists criticised the move, which came in the midst of intense downward pressure on the currency. Others said the central bank was aiming to break the cycle of downward bets against the pound as a prelude to devaluation or flotation.
“The intention is there and preparations are there to weaken the currency ... whether in the decisions of the last two months or the meeting of the central bank with the exchange bureaus,” said Hany Genena, economist at Beltone Financial.
Last week, the central bank met foreign exchange bureaus and sources said an agreement was reached to cap the black market rate at about 8.65 pounds to the dollar.
Dollars were selling for 8.72 pounds on the unofficial market on Sunday, up from about 8.75 a week ago.
The central bank has taken a series of steps in recent months to ease the dollar shortage that had seen shipments pile up at ports with companies unable to open letters of credit.
In January, it raised the cap on forex deposits at banks for essential goods and has also introduced measures to reduce imports, hoping this will curb demand for hard currency.