Cairo – Mubasher: Egyptian pound's (EGP) devaluation would not be a magical solution to the country's tight external position, according to a Tuesday's report by Pharos research.
Amid the absence of foreign currency (FCY) inflow to support the reserve, having a fixed or semi-fixed exchange rate is "an unrealistic assumption", the report indicated, stressing that devaluation first and foremost aims at improving FCY liquidity in the official FX market as well as creating a more flexible exchange rate regime.
"We note that a crucial part of the IMF package implies setting a floor for the net foreign reserves. Such a floor means that the CBE's ability to intervene in the FX market will be limited. That is exactly why more exchange rate flexibility is truly expected", said the research agency.
On a macroeconomic basis, a full EGP floatation is the best course of action for honing inflation level and wide budget deficit, which are prerequisites of IMF agreement, but political dimensions have the upper hand in this decision.
External sector's pressure is likely to keep pulling EGP further down in the fiscal year 2017, Pharos added.
In FY2015/16, Egypt's merchandise trade deficit narrowed from 11.9% of GDP in the previous year to 10.6% in FY2015/16 on lower commodity prices.
Services surplus shrank from 1.5% of GDP in FY2014/15 to 0.6% in FY2015/16.
Thanks to the sharp decline (-12.6%YOY) in private transfers, remittances of Egyptians working abroad in particular, the current account deficit widened from 3.7% of GDP in FY2014/15 to 5.3% in FY2015/16.
