Goldman Sachs Report: Egypt Lacks Desire for Flexible Exchange Rate amidst Economic Uncertainty

08:01 PM

Tuesday, June 13, 2023

I wrote – Manal Al-Masry:

Goldman Sachs, one of the American global financial institutions, believes that Egypt has a low desire to move to a more flexible exchange rate for the pound against foreign currencies, which is the first pillar of the economic reform program with the International Monetary Fund, in light of the current economic conditions.

Goldman Sachs stated in a report entitled “Notes on Egypt’s Journey: Amidst High Uncertainty,” which Masrawy obtained a copy of, that there is a consensus that any attempt to unify the exchange rate will require a large amount of liquidity injection from foreign exchange in light of the accumulation of import orders. which has arisen over the past few months.

The bank added that any efforts to convert to a flexible exchange rate for the pound against foreign currencies in the absence of foreign exchange inflows could cause a significant rise in foreign exchange rates against the pound, or would not lead to the elimination of the black market for illegal currency trade.

The bank confirmed that the experience of the three devaluations of the exchange rate over the past 16 months proved this.

Egypt began moving to a flexible exchange rate regime since March 2022 to face the repercussions of the Russian-Ukrainian war on the Egyptian and global economy, which led to the exit of $22 billion in indirect foreign investments in a short period, which was reflected in the availability of foreign currencies, causing a shortage crisis so far. But the exchange rate has stabilized in recent weeks.

Egypt’s transition to a more flexible exchange rate led to a sharp decline in the price of the pound, during which it lost about half of its value in the past 15 months, and the price of the dollar rose against it during this period by about 96%, reaching about 30.94 pounds for sale in banks now, compared to 15.76 pounds on March 20. 2022, before the currency price moves.

The bank indicated that there is a clear point of view that one of the main reforms facing Egypt is its transition to the flexibility of the pound’s exchange against foreign currencies, but that depends on the government accumulating sufficient foreign currency reserves in order to manage the risks of currency depreciation due to the weak desire for more foreign exchange. Double the pound.

He added that economic expectations about Egypt’s transition to a more flexible exchange rate will remain dependent on progress in asset sales, the most likely source of this liquidity.

The bank believes that Egypt needs funds amounting to $5 billion to be used for the transition to a more flexible exchange rate.

Goldman Sachs stated in its report: “We are not optimistic about the possibility of conditions for a transition to a more flexible exchange rate regime in the coming months, which increases the risks to the IMF program.”

Last January, the International Monetary Fund revealed the loan documents provided by it to Egypt worth $3 billion last December, which will be disbursed in tranches over a period of 46 months, with Egypt’s commitment to a flexible exchange rate for the pound against foreign currencies and the exit from its assets in favor of the private sector to ensure the continued implementation of the economic reform program. To bridge the financing gap for the dollar.

The International Monetary Fund expected that its approval of providing a loan to Egypt would contribute to attracting $14 billion in additional financing from regional and international financial institutions, including the Gulf states’ purchase of shares of state-owned assets.