Egypt’s central bank kept the pound stable at 8.78 to the dollar at its weekly foreign exchange auction yesterday, confounding expectations of an impending devaluation that had driven up the stock market.
The central bank said it sold $118.6mn at its regular forex auction at the existing rate.
The announcement confirmed earlier comments from bankers.
Egypt devalued the pound by about 14% in mid-March in an effort to crush a black market for dollars that has burgeoned amid an acute foreign currency shortage that has hurt businesses and discouraged investment.
But the black market rate has since depreciated, putting renewed pressure on the central bank to take further action.
Speculation mounted that a second devaluation was in the offing after Central Bank Governor Tarek Amer told local newspapers in early July that his focus was on stimulating the economy and moving to a more flexible exchange rate policy.
“Personally, I would not be happy if the exchange rate is stable but factories are halted,” Amer told Al Mal newspaper.
Egyptian stocks had rallied this week as expectations built that the central bank might devalue yesterday, at its first auction after last week’s Eid al-Fitr holiday.
Egypt’s stock market fell 1.77% by 11:12am (0912 GMT) after bankers said no devaluation had occurred.
The index was down 0.65% at 2:44pm.
Two black market traders said they were selling the dollar at about 11.55 pounds, reflecting the widely-held view that a devaluation is still likely soon.
Economists say a devaluation is all but inevitable though the central bank may clear a backlog in forex demand from importers of essential goods before it moves.
Timing is key, say economists, if Egypt is to maximise the impact and minimise the inflationary effect. Egypt’s last devaluation pushed core inflation to seven-year highs.
The central bank has raised interest rates by 250 basis points since mid-March to slow inflation, but this has increased borrowing costs for the government and businesses.
Plans to introduce Value Added Tax are likely to further raise prices.
But this step, and subsidy and other reforms, are seen as necessary if Egypt is to seek a loan from IMF.
“Devaluation will still happen, but we think the government will prefer to get its ducks in a row first by passing the VAT and making other fiscal changes,” Simon Kitchen, head of Macro-Strategy at EFG-Hermes, told Reuters.
“Egypt is also likely to seek IMF support before it shifts to a more flexible FX regime.”
The central bank said when it devalued in March that it would pursue a more flexible approach but has since held the pound steady.
It also said forex reserves would reach $25bn this year, a level Amer has said would allow for more flexibility.
Egypt’s foreign reserves rose to $17.546bn in June, but remain at half their levels before the 2011 uprising ushered in a period of political turmoil that scared away tourists and foreign investors.