Egypt’s stagnant exchange rate is likely to see more movement after a system that guaranteed foreign investors could repatriate dollars was terminated, but the central bank stands ready to fend off speculators and ensure debt holders don’t lose out, Governor Tarek Amer said.
“We will witness more volatility in the currency after the repatriation mechanism was shut down as investors will now have to go through the interbank market,” Amer told Bloomberg News in an interview. The central bank shut down the repatriation mechanism in December.
“We are committed to ensuring that the market is free and clears itself, but at the same time we have reserves that help us to confront any speculators or disorderly market practices. We are committed to ensuring that the holders of Egyptian debt always make better return,” he said. “The reserves help us to defend the new foreign exchange regime and the interest rate can be used as a tool.”
Amer’s remarks are likely to go some way to reassuring foreign investors scrutinizing Egypt’s economic policy as the country wraps up a three-year, $12 billion loan agreement with the International Monetary Fund this year.
Before securing the loan in November 2016, authorities liberalized the exchange rate, causing the pound to halve in value virtually overnight. The move helped unleash billions of dollars of inflows into local-currency debt.
Many foreign investors relied on the repatriation mechanism, mindful that a shortage of foreign currency in previous years had made it difficult to take profits back out.
Since then, the pound has hovered around 18 to the dollar despite the headwinds that have repeatedly battered other emerging market currencies, raising questions about whether the central bank or state banks were quietly propping up the currency.
The central bank has repeatedly said it does not intervene in the market. Amer attributed the pound’s stability to an improvement in the current account, due to increased remittances, tourism and exports, and the improvement in Egypt’s credit rating.
A lack of financial derivatives in the market had also offered shelter from the broader emerging market tumult, he said.
Uncertainty that swept through emerging markets last year saw some $10 billion flow out of Egypt, raising the cost of borrowing and threatening to derail the government’s budget deficit targets as it enters the final stages of its three-year economic overhaul.
Amer said that January saw the first net positive foreign investor inflows since May 2018.
“Despite the outflight, we have a stock of portfolio investments that exceeds $10 billion and our reserves witnessed an insignificant decline despite the outflows, reflecting the resilience of our economic fundamentals,” he said.
Egypt’s foreign exchange reserves recovered from about $15 billion before the devaluation to an all-time high above $44 billion in November, but dropped about $2 billion the following month due partly to a delay in the fifth installment of its IMF loan.
Amer said Egypt expects to receive that payment in late January or very early February at the latest.
“We’re agreed on everything, agreed with the mission on Egypt’s performance during this phase and there’s agreement on our commitment to the program,” Amer said. Asked if there were any sticking points outstanding, Amer said: “No.”
The installment had been due in December but was delayed as Egypt hashed out with the international lender the timing of planned changes to its fuel-pricing mechanism.