ANALYSIS-Egypt devaluation delay may only add to post-election pain

Egypt looks unlikely to devalue its currency again before a December presidential election for fear of popular unrest, but with the pound sagging against the dollar on the black market the delay means the move may simply be more painful when it comes, analysts say. While President Abdel-Fattah al-Sisi is expected to win re-election, inflation has surged to record highs and deep-rooted economic problems have been exposed by a chronic shortage of foreign currency since early 2022.

Egypt looks unlikely to devalue its currency again before a December presidential election for fear of popular unrest, but with the pound sagging against the dollar on the black market the delay means the move may simply be more painful when it comes, analysts say.

While President Abdel-Fattah al-Sisi is expected to win re-election, inflation has surged to record highs and deep-rooted economic problems have been exposed by a chronic shortage of foreign currency since early 2022. All that points to the need for another devaluation, but authorities worry that this, or imposing austerity measures, during the campaign could trigger unrest at a time of high political tension, analysts said.

The election will take place on Dec. 10-12, the election authority announced on Monday. In a $3 billion financial support package signed with the IMF last December, Egypt agreed to let its currency float freely and to speed up the sale of state assets to narrow its budget and current account deficits. Progress has been slow on both counts.

Since March, Cairo has kept the pound fixed against the dollar at a rate of 30.85/95 even as the local currency slid on the black market to around 40 pounds per dollar by mid-May. In the year prior to March the pound lost nearly half its official value, with devaluations accompanied by bursts of high inflation.

"The government has emphasised its concern that previous currency falls and surging inflation have inflicted severe pain on the Egyptian population; officials are no doubt concerned about the threat of social unrest," James Swanston of Capital Economics said in a note. Inflation in the year to August accelerated to a record 37.4%, while M2 money supply increased by 24%, suggesting the currency is set to weaken further.

"With inflation running hot, the longer Egypt delays a move to a more flexible exchange rate regime, the bigger the drop from current levels for the pound," said Farouk Soussa of Goldman Sachs. 'DOWNWARD PRESSURE'

The IMF was due to disburse funds twice a year over 46 months, but delayed the June payment amid reports it was unhappy with Egypt's progress. "The clear risk is that all of this further delays reviews of Egypt's IMF deal, and downward pressure on the pound mounts," Swanston wrote.

A report by the Institute of International Finance (IIF) estimated this month that the pound was over-valued by 10%, a figure that would grow to around 20% by the end of 2024. "High inflation, declining trading partner inflation, and a fixed exchange rate" could all contribute to pressure on the pound, the IIF said.

Still, Carla Slim of Standard Chartered said it was possible a delayed devaluation might soften the currency adjustment, provided the government moved forward on asset sales. "I think a delayed devaluation could actually mean a less steep adjustment because the authorities would have allowed more time for USD inflows from asset sales to materialize, leading to a further narrowing of the net foreign liability position."

Faced with a foreign currency shortage, banks and importers have adopted new stratagems to get around restrictions on opening letters of credit (LCs) or arranging direct cash payments for imports, bankers, importers and analysts say. Shortages of factory and other inputs have been slowing growth, economists say.

Exporters, who can use foreign currency from sales abroad to pay for imports, have begun teaming up with importers to buy goods. Importers also buy dollars with Egyptian pounds on the black market, then sell them back to certain banks at the official exchange rate. The banks will then open LCs for the value of the pound transaction plus a premium of 10% to 20%.

But this can add 35% to the cost of goods purchased abroad, two importers told Reuters. For now though, politics looks set to trump economics, with no official talk of a devaluation heard as the country rumbles on towards polling day.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)