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Investing.com: A Necessary But Insufficient Devaluation

As previous devaluations show, it is necessary to have a sufficient liquidity shield to maintain control over Forex market.
25.10.16 | Interesting article at Investing.com

The Egyptian pound needs to be devalued due to the deterioration in the country’s export competitiveness and the squeeze on foreign-currency liquidity. As previous devaluations show, not only in Egypt but also in Argentina, it is necessary to have a sufficient liquidity shield to maintain control over the forex market. Past devaluations also show that improvements in external accounts depend on numerous factors that are not directly linked to exchange rates. Thanks to external financial support, the Central Bank of Egypt (CBE) should have enough liquidity to successfully carry out the devaluation. Yet external accounts are unlikely to improve before the energy deficit has been significantly reduced from 2018.
The devaluation of the Egyptian pound, expected in the weeks ahead, raises numerous questions. In an increasingly unsustainable economic situation, this devaluation is one of the preconditions – along with energy subsidy reforms and the securing of bilateral and multilateral financing – for the signing of a financial assistance agreement with the IMF.
The spread between official and parallel market exchange rates is currently at a record high of more than 60%. This spread is due to foreign currency rationing on the official market as well as to increasing volatility fed by rumours about an imminent devaluation. The competitiveness of Egyptian exports has eroded significantly. The real effective exchange rate has risen practically 50% since 2009. At the same time, Egyptian exports as a share of world trade have fallen by half, from 0.9% in 2009 to 0.45% in 2015. The central bank’s foreign currency liquidity has deteriorated constantly since 2011, and has reached an alarming level of less than three months of imports of goods and services.