A reckoning for the pound - Economy - Al-Ahram Weekly

Al-Ahram Weekly

2 days ago

A strong currency is one that trades where the world believes it should and stays there not by decree but by design.
By any measure, Egypt's economy has been through a crucible. In just over a decade, the pound has seen four major devaluations from around LE6 per dollar in 2012 to over LE50 in 2025. Yet, currency values are not accidents. They are not mysterious or unfair. They are judgements that are brutal and often painful but that are rendered by the global and domestic markets on the integrity of economic policy.
In March 2024, the Central Bank of Egypt (CBE), under intense pressure from the markets and in coordination with the International Monetary Fund (IMF), did what it had long resisted and allowed the pound to float freely. The pound then plunged more than 60 per cent overnight, but what followed was both instructive and oddly reassuring. After years of defending an overvalued currency often with borrowed reserves, capital controls, and rationed imports, Egypt stepped into a new era and one without illusions.
The government's move was not only bold but essential. As economist Mohamed Al-Erian noted in the wake of Egypt's 2016 floatation, a functioning exchange rate is not a trophy; it is a signal. It tells investors whether they are welcome. It tells exporters whether they are competitive. And it tells citizens whether their government is willing to treat the causes of economic weakness rather than its symptoms.
Since the 2024 floatation, the pound has recovered slightly and is now hovering near LE50 per dollar. The parallel market has disappeared, and the country's foreign reserves have risen to an all-time high of $48 billion. Inflation, though still elevated at around 13 to 14 per cent, is easing. The IMF has expanded its loan programme to Egypt to $8 billion. For the first time in years, investors both domestic and foreign are hearing a signal that makes sense.
Yet, Egypt's long-term problem was never just the value of the pound. It was the belief that its value could be legislated, defended, or wished into strength. Over the last 70 years, the country has suffered no fewer than eight currency crises. Each time, the pattern has been the same: deficits widened, the pound became overvalued, the reserves fell, inflation soared, and the inevitable collapse arrived. Each time, the public bore the cost. Each time, the state vowed reform only to slip back into crisis-management mode.
Egypt's exchange-rate policy can be described as a pendulum between liberalisation and defensiveness. And pendulums, unlike policies, do not move forward. What has changed today is not merely the floatation. It is, potentially, the philosophy. Egypt has joined the BRICS group of countries. It is exploring bilateral trade in local currencies with several other economies including India, China, and Russia. It is restructuring state assets, attracting Gulf investment, and cautiously privatising military-owned enterprises. Most importantly, it is pursuing a path where the exchange rate, for the first time, might reflect reality.
But realism has a price. The next three years will test Egypt's ability to walk a narrow road. Forecasts expect the pound to stabilise at around LE50 to LE52 per dollar in 2025 and LE54 to LE56 per dollar in 2026 and 2027. All assume continued reforms and external financing. But all also flag risks. If the US Federal Reserve cuts rates in late 2025, Egypt could attract investment inflows. If global oil prices spike, the imports bill could bloat. If tensions re-escalate in Palestine, Sudan, Libya, or Yemen, tourism and Suez Canal revenues could fall. If any of these occur, the pound may revisit the LE60 mark or worse.
The more constructive view, shared by some Egyptian economists, is that the pound is now undervalued. The post-floatation exchange rate likely overshot its equilibrium, opening room for recovery. Real interest rates, now positive, will support this. So too will a moderation in inflation, which is projected to fall to 12 to 13 per cent by the end of 2025 and single digits by 2026. That outcome is possible. But only if the state sustains its reforms.
A 2018 study titled 'Identifying currency crises indicators: The case of Egypt' by Adams and Metwally found that Egypt's currency collapses were driven by five forces: an overvalued real exchange rate, low real interest rates, rising US rates, wide current account deficits, and political shocks. Four of those five are still active. What is different is the government's apparent commitment to break the cycle. The establishment of the Ebda Initiative for Industry, the renewed partnership with the IMF, and a willingness to let the pound find its level are steps in the right direction.
But intentions are not immunity. Emerging markets do not become resilient through aid or appeals. They do so by building institutional trust. That means that Egypt must sustain a real flexible rate, not a managed shadow peg. It must reduce budget deficits not by cutting critical spending, but by rationalising subsidies and reforming procurement. It must attract foreign direct investment (FDI) with clarity, meaning guaranteeing property rights, level competition, and judicial fairness.
All successful emerging markets, including Vietnam, India, and Indonesia, have faced this challenge. All have succeeded by welcoming investment with predictable, not perfect, policy.
There is also room for innovation. Egypt could reduce its dollar dependency by expanding its local currency trade with partners. It could issue diaspora bonds pegged to inflation, offering Egyptians abroad a patriotic and financially sound way to invest. It could hedge oil and wheat imports on global markets, shielding itself from price spikes. It could allow broader use of inflation-linked contracts, enabling firms to plan with less foreign-exchange exposure. And it could create a stabilisation fund to save foreign-exchange windfalls from tourism or energy, using them to smooth currency cycles.
None of these ideas is radical. They are simply underused. And they work.
Importantly, none of this requires sacrificing exports. A stronger pound, if rooted in real productivity, better logistics, and smarter policy, will not hurt competitiveness. China, India, South Africa, Brazil, Germany, Spain, Switzerland, and Singapore have all built export power with flexible and even appreciating currencies. Egypt can do the same if it backs reforms with investment in skills, infrastructure, and governance.
The danger lies not in strength, but in illusion. The economist Henry Hazlitt once warned that 'the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.' Egypt has too often opted for the immediate: the fixed rate, the rationed dollar, and the borrowed reserve. It is time to think of the broader picture.
The government's recent moves deserve recognition. Letting go of the pound's illusion of strength especially in a region full of currency anchors was an act of political courage. So was raising interest rates, restructuring public assets, and weathering the storm. There is much to commend in the CBE's recent clarity and the Finance Ministry's discipline. The public has shown remarkable resilience in absorbing the shocks.
But courage now must be matched by consistency. Egypt's economy will not flourish because its currency is defended. It will flourish when its currency is trusted. That trust will be earned, not declared. And it will be sustained not by force, but by reform. The pound will hold its value when policies do. The illusion has fallen. That is cause for optimism not fear.
The task ahead is to ensure that Egypt never again confuses the symbol of strength with its substance. A strong pound is not one that trades at seven or 15 or even 50 to the dollar. It is one that trades where the world believes it should and stays there not by decree but by design.
The time for illusion has passed. The era of substance can begin.
The writer is an economic advisor at the UK-based IBIS Consultancy.
* A version of this article appears in print in the 29 May, 2025 edition of Al-Ahram Weekly
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