Goldman Sachs issued a report on the repercussions of the recent economic decisions announced by Egypt. The report included several positive messages about the future path of the Egyptian economy, especially in relation to the annual inflation rate, which is expected to decline to 25 per cent from 35 per cent by the end of this year, writes Ahmad Abdel-Rahman.

The US bank, Goldman Sachs, said that a fall in inflation would happen thanks to the rise of the local currency in the parallel market, or the illegal black market;   the release of goods from ports; and the retreat from stockpiling goods by local merchants.

The Goldman Sachs report began by referring to the recent measures announced by the Central Bank of Egypt (CBE) on March 6, which included raising interest rates by 600 basis points. The report also referred to the step that came after this procedure, which related to adjusting the exchange rate and then announcing the new financing package provided by the International Monetary Fund (IMF) worth USD 8 billion, indicating that these adjustments exceeded expectations.

Recovery of the Egyptian pound

Goldman Sachs expected the Egyptian pound to recover from its current level by the end of this month thanks to a number of factors, most notably the return of investment flows in government debt instruments. Other reasons were: a strong return in external demand for domestic debt (treasury bills); currency depreciation and high nominal yields. In addition, there is an expected decrease in government borrowing requirements, against  the backdrop of the state treasury receiving half of the proceeds from the Ras El Hekma project deal in Egyptian pounds. This is expected to lead to a reduction in government borrowing requirements.

The report continued that among other factors leading to the Egyptian pound's recovery is the decline in local dollarization, especially since the American bank expected that  consumers would start pumping their foreign currency savings, that were kept outside the banking system, into official channels. A new tranche from the IMF is also expected, as the bank expects that additional amounts will be disbursed from the IMF. The bank also expects to redirect the fund's transfers to the banking sector in the coming weeks.

Regarding the inflationary effects of the decision to float the Egyptian pound, Goldman Sachs explained that the devaluation of the currency that has occurred is unlikely to be inflationary. It also expected the annual inflation rates to decline to 25 per cent from 35 per cent by the end of this year. Among the reasons for this, is the rise in the value of the currency in the parallel market (the illegal black market ) as the Egyptian pound reached a level of more than 70 pounds to the dollar in the parallel market during the past month. Therefore, the official rate of 50 pounds against the US dollar represents an effective appreciation of the currency, as most transactions are carried out at the black market rate.

The report added: "Expectations indicate that the official exchange rate of the pound will reach levels of approximately 40 pounds to the dollar, and that obstacles in supply chains will be removed." The US bank said that USD1.3 billion worth of goods were released and that this would help relieve supply pressures locally, and the decline of local merchants from stockpiling goods. The bank noted that foreign exchange rate unification would prevent such behaviour in the future.

At the same time, Morgan Stanley expected to raise Egypt's credit rating after the CBE's decisions regarding applying the fair price of the Egyptian pound, suggesting that further upward movements in the foreign exchange market in Egypt will likely be limited. This development will help maintain some economic flexibility, taking into account the large amount of foreign currency liquidity that Egypt obtained due to the Ras El Hekma project, in the historic deal with the UAE, and the announcement of a new USD8 billion agreement with the IMF.

The bank expects that the next step for the Egyptian economy will be an improvement in its ratings. This is likely to happen as rebuilding foreign liquidity reserves was a major factor in achieving a positive rating.

Photo: Inflation has wrecked the Egyptian economy (by Adobe)