Egypt is shutting down a mechanism that guarantees that overseas investors can repatriate their foreign currency earnings.
(Bloomberg)--The move could mean more volatility for the stagnant Egyptian pound.
When the central bank designed the mechanism, Egypt was suffering from an acute shortage of foreign currency. Strict capital controls had all but paralysed trade and foreign investors in Egyptian securities found they could not get their profits out of the country. For a fee, those who went through the scheme were guaranteed their money back.
After Egypt liberalised its currency regime in November 2016, securing a $12 billion International Monetary Fund loan, billions of dollars’ worth of investments flowed into domestic government debt through the repatriation mechanism. Foreign exchange reserves recovered from near emergency levels to hit new records and the crisis receded.
The central bank raised the cost of using the mechanism about a year ago, encouraging more overseas holders of Egyptian local debt to use the interbank market—boosting reliance on the banking sector and market forces. But the move did not translate into increased movement in the currency as analysts had predicted.
Since halving in value when capital controls were initially lifted, the Egyptian pound has hovered around 18 to the dollar despite the headwinds that have repeatedly battered other emerging market currencies in recent months. The IMF urged Egypt to ditch the mechanism last year, saying it was distorting the currency market. The central bank says it has not intervened since floating the currency in 2016, but markets will monitor the impact of the move closely.
“It encourages banks to manage portfolio flows. It may lead to greater FX flexibility over time—that would be proven if there were major shocks, positive or negative, in global markets that affected portfolio flows to and from Egypt,” said Simon Kitchen, Head of Global Strategy at Cairo-based investment bank EFG-Hermes.
The decision comes as foreign holdings of Egyptian domestic debt plummet, buffeted by broader emerging market volatility. Some $10 billion have flowed out of the Treasury bill market in the last seven months, with total overseas holdings reaching around $11.7 billion at the end of October.
Balances already held in the mechanism before the 4 December cut-off will be honoured. Any additional investments in local T-bills, bonds or stocks listed on the Egyptian exchange will now have to go through the interbank market.