x Abu Dhabi, UAEMonday 24 July 2017

Egypt's currency trapped in a dilemma

With all the debate in Egypt, the real question is not whether there should be a devaluation but whether it should be "orderly" or "disorderly".

With all the debate in Egypt, the real question is not whether there should be a devaluation but whether it should be "orderly" or "disorderly".

In other words, whether the currency's decline will be "managed" or allowed to fall freely.

So far, the government's intervention has prevented a free fall but foreign reserves used to prop up the pound are not infinite.

That is why attention is focused on external financing, with the emphasis on the IMF and other international donors such as the Arabian Gulf.

That would boost Egypt's coffers and restore investor confidence in the crippled economy. Even with an IMF loan and other donors coming through, it is likely Egypt's domestic currency will devalue slightly, as it has been doing for the past year.

The argument for a devaluation is to relieve pressure on the foreign currency reserves, a vital pot for buying imports, and to encourage exports as goods would be cheaper.

However, many economists also say it would have a detrimental impact by increasing inflation, which is already high in Egypt, and increase the cost of imports, which the country already struggles to buy because of its inefficient food and energy subsidy systems.

The counter-argument to this is Egypt's economy is already weak, so any inflationary pressure will not be huge.

business@thenational.ae