Egypt allowed the pound to slide to a new low on Wednesday as the country grapples with a foreign currency crisis that is choking businesses.
The pound fell by as much as 14 percent to trade at 32.2 against the US dollar.
The slide in the currency comes after Egypt agreed to move to a flexible currency system as part of a $3 billion bailout from the International Monetary Fund aimed at helping ease a nearly year-old foreign currency shortage.
Since the central bank said it would move to a flexible currency rate in October, the pound has lost nearly 35 percent as it was allowed to fall in stages. But analysts have warned that it has to fall further to ensure the restoration of supply and demand balance in the foreign exchange market.
The weakness of the pound adds to the suffering of millions of Egyptians as it fuels inflationary pressure, as urban inflation reached 21.3 percent in December, its highest level in years.
It is estimated that 60 percent of Egypt’s 100 million people live below or just above the poverty line.
The Arab country was exposed to headwinds from Russia Ukraine invasion, which led to higher energy and food prices. It also caused capital flight from Egypt, as foreign investors withdrew about $20 billion from the domestic debt in February and March last year.
The outflow of capital has sparked a foreign currency crisis and forced Cairo to borrow more than $13 billion from Gulf states and seek help from the International Monetary Fund for the fourth time since 2016.
The Central Bank of Egypt raised interest rates last year in a bid to attract inflows of foreign portfolios and finance the country’s account deficit. However, these measures did not relieve pressure on the currency.
The $3 billion IMF loan was agreed in October after months of talks, with the fund estimating that Egypt faces a financing gap of $17 billion over the next four years.
Analysts and businessmen say the country’s troubles have been exacerbated by the military’s role in the economy, which has expanded since President Abdel Fattah al-Sisi seized power in a 2013 coup.
As the military has been responsible for hundreds of infrastructure projects and has expanded its presence across multiple sectors, it has been blamed for crowding out the private sector and hampering the foreign direct investment needed to bring in sustainable sources of foreign currency.
Analysts also complain that the country has been living beyond its means as Sisi has pushed ahead with a raft of large infrastructure projects.
Egypt is the second largest debtor to the International Monetary Fund after Argentina, and has become increasingly dependent on support from oil-rich Gulf states, including Saudi Arabia, the United Arab Emirates and Qatar.
The International Monetary Fund said on Tuesday that Cairo had agreed to structural reforms to reduce the role of government entities, including military-owned companies, in the economy. She said Egypt needed a “permanent shift to a flexible exchange rate system to increase resilience to external shocks and rebuild external barriers.”
But the Fund also warned that “fiscal consolidation in the context of a rising cost of living may face a political and social setback.”
The viability of the transition to a flexible exchange rate remains to be proven [central bank] It may face political and social pressures to reverse course,” the IMF said. “The proposed structural reforms will take time to implement and achieve their desired results, while reforms aimed at reducing the role of the state may face resistance from vested interests in the country.”
The currency is approaching levels that are attractive to foreign investors, but interest rates on domestic debt will also need to rise to reactivate it, according to Kevin Daly, emerging market fund manager at Abrdn.
“I don’t expect to see large inflows of dollars into the market until you get a higher price adjustment,” he said. Short-term government debt yields are about 20 percent, Daley added, but would need to rise to nearly 30 percent to “get people out of their seats.”