Egypt’s new central bank governor, Hassan Abdalla, faces a daunting task as he tries to repair an economy derailed by an overvalued currency, rampant inflation and a banking system emptied of most of its foreign currency.
President Abdel-Fattah al-Sisi chose Abdalla for the position last week after outgoing governor Tarek Amer resigned suddenly, barely a year before the end of his four-year tenure.
In making the appointment, according to Reuters, Sisi tapped into the band of liberal reformers who led the charge to open the economy in 2004.
Abdalla was managing director of Cairo-based Arab African International Bank from 2002 to 2018. He sat on the board of the central bank and headed the economic committee of the ruling National Democratic Party under then-president Hosni Mubarak.
A treasurer early in his career, Abdalla helped pioneer an interbank currency market in 2004 as part of the reforms, which also included slashing income tax to a uniform 20% and lowering most customs duties to 20%.
WEAKENING THE CURRENCY
Abdalla will now have to chart out whether to devalue the currency and, if so, how quickly.
To support the Egyptian pound, his predecessor erected capital controls that have blocked imports deemed non-essential, restricted factory inputs, and hindered businesses and travellers from transferring foreign currency abroad, businessmen say.
In the past few months, foreign currency has largely disappeared from the interbank market, bankers say.
“I guess he (Abdalla) will go much faster in terms of currency adjustment. Not a sudden devaluation like Tarek did, (rather) a faster pace,” said Hisham Ezz al-Arab, former chairman of CIB, Egypt’s biggest private bank, who was on Wednesday announced as an adviser to the new governor.
The central bank’s tools will be limited. The war in Ukraine, which has caused global shockwaves, has dented portfolio investment and tourism while and increased commodity import bills.
In the year to June 30, more than $35 billion in foreign currency left the central bank and the banking system, with net foreign assets plunging to a negative 370.1 billion Egyptian pounds ($19.3 billion) from a positive 251.7 billion pounds, according to central bank data.
A current account deficit drained $5.79 billion from the economy in the first quarter of 2022 alone.
Much of Egypt’s 103 million population has been hit by austerity measures since a $12 billion accord with the International Monetary Fund in 2016. Annual inflation is now running at 13.6%, its fastest since March 2019.
HELP FROM THE IMF?
Egypt began talks in March for a new IMF loan, but the fund last month said Cairo still needed to make “decisive progress” on fiscal and structural reform. read more
Gulf countries have provided tens of billions of dollars in investments and deposits to support Egypt since Russia invaded Ukraine in February, sending a tide of inflation crashing through the world economy. They are expected to provide even more to help Cairo seal an IMF deal.
This month the Egyptian government dimmed the lights in Cairo’s Tahrir Square and ordered shops and malls to turn down air conditioning to save gas that can be exported for foreign currency.
The pound’s official rate has weakened to 19.15 to the dollar from 15.80 in March. Despite a crackdown on the black market, the currency sells for around 20 pounds on the street and, bankers say, 21.00/25 among bigger customers.
James Swanston of Capital Economics said the pound needs to depreciate by another 24%.
“We think the currency needs to fall a lot further and that it needs to fall to 25 to the dollar by the end of 2024. Ideally, this would be a gradual managed weakening of the pound to avoid sharp devaluations that can be more damaging.”
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A devaluation and sales of state assets appear to be key conditions for an IMF deal. Egypt this year committed to selling $10 billion in state assets over each of the next four years.
“I think the minute they sign with the IMF he will have more flexibility and a mandate to do a managed float… A proper one,” Ezz al-Arab said of Abdalla.
($1 = 19.1400 Egyptian pounds)