By Mohamed Gad

CAIRO, Oct. 19 (Aswat Masriya) - The recurring depreciation of the Egyptian pound by the Central Bank of Egypt (CBE) throughout 2015 comes in line with recommendations by the world's largest global financial institutions to adopt a flexible exchange rate policy, one that will exert pressure on Egypt's foreign reserves for years to come.

Since January, the Egyptian pound has lost 79 piasters against the dollar, taking the currency's decline to the year to 11 percent.

Both the International Monetary Fund (IMF) and the World Bank have advised Egypt to adopt such a "flexible" policy, in light of the domestic and international economic slowdown.   

The most recent depreciation by the Egyptian central bank was on Sunday and was the second in less than a week.

While the CBE does not disclose the measures it takes to stabilise the currency, since December 2012 it has been regulating the currency exchange rate by selling dollars to commercial banks in public auctions.

At the beginning of 2015, the official auction price was 7.14 Egyptian pounds to the dollar but after Sunday's depreciation, the exchange rate has become 7.93 pounds against the dollar. On the ground the dollar is selling for more than 8 pounds. 

The IMF projects that foreign exchange pressures on Egypt will continue for years. The flexible policy it recommends means bringing the currency exchange rate closer to the local currency's real value, which is determined by the strength of the economy. This involves lifting measures put in place to protect the local currency, allowing its value to be decided according to supply and demand.

The Financial Times said last week that the pound is the "most overvalued currency with a current account deficit in emerging markets."   

The IMF said in a report in February, after talks with Egypt that both the CBE and the IMF agreed that there should more flexibility, but did not share the same views on the priority attached to it and on the timeframe.  

The central bank "agrees that more flexibility in the future is desirable, but only once conditions are appropriate," the IMF report said.

Prior to Sunday's depreciation, analysts had projected that the exchange rate would drop to 8 pounds against the dollar by yearend. But after the depreciation, analysts projected that it may change hands at between 8.20 and 8.25 to the dollar by the end of 2015, signaling that the pound is depreciating faster than had been expected. 

The price of the pound against the dollar reflects the ability of the Egyptian economy to attract foreign cash inflows, which places a lot pressures on the Egyptian pound amid the hefty challenges Egypt faces when it comes to attracting foreign investment.

Years of political turmoil have taken a toll on Egypt's economy after the 2011 uprising which toppled then-President Hosni Mubarak. Egypt's foreign reserves have fallen by more than half since then, tumbling to $16.335 billion at the end of September after dropping by around $2 billion.. The ensuing instability has taken a toll on tourism, which was previously one of the main sources of hard currency for Egypt.   

To face outflows of capital, reduced foreign direct investment and a widening account deficit, the central bank supplied foreign currency to keep the pound stable, the IMF said.

"While this provided an anchor to maintain confidence, it depleted international reserves," the IMF said in its report in February, which also projected that direct investment as a percentage of the gross domestic product will not exceed pre-2011 rates before the fiscal year 2017/2018.

At the conclusion of a trip to Egypt last month, an IMF delegation said "a gradual move toward a more flexible exchange rate policy focused on achieving a market-clearing rate would serve Egypt’s interests. Such a move would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment."

But despite multiple depreciations of the pound this year, government figures show a decline in non-petroleum exports by nearly a third since the start of the year and until the end of September. They dropped from $17.2 billion to $13.897 billion year on year.

The central bank's depreciation on Sunday brought the pound from 7.83 to 7.93 against the dollar in the official exchange auction, but in effect the dollar has since been changing hands at over 8 pounds since commercial and exchange shops are allowed to add or subtract 10 and 15 piasters, respectively from the official rate.  

It will sell for even higher rates on the black market, which has resurfaced despite measures by Egypt's government to eliminate it earlier this year. Within hours of the depreciation on Sunday, the dollar climbed to 8.40 against the Egyptian pound on the parallel market.

Omar El-Shenety, an executive at Multiples, an investment banking group operating in Dubai and Cairo, told Aswat Masriya earlier this week that amid a decline in grants and aid from Gulf countries, the current budget deficit and the inability of foreign investment and tourism to fill this deficit, the depreciation of the pound is "inevitable to protect foreign reserves."

He echoed statements by Investment Minister Ashraf Salman last month, when he said "the depreciation of the Egyptian pound is no longer a matter of choice under the current local and international economic circumstances." 

Shenety expects depreciation of the pound by five to seven percent annually for the next four to five years, adding that the percentage may reach up to 10 precent if the pressure increases. 

His expectations are lower than projections by investment bank Renaissance Capital which forecast a depreciation of 20 percent in the next two years.