Nigeria may have put the cart before the horse with its floatation of the naira, but Egypt has made no such mistake.
It was hardly a surprise when Egypt devalued its currency on Wednesday after over a year of a flawed peg to the dollar that drained liquidity in the foreign exchange market and caused the official and unofficial exchange rates to fly apart.
Devaluation bets had swirled around Egypt for months as analysts grew bolder in their predictions that the Egyptian pound would be devalued for the fourth time in two years.
They were emboldened by the worsening scarcity of dollars in the economy and the lack of investor confidence in the monetary policy regime.
UK-based HSBC bank had in December 2023 projected a devaluation of the Egyptian pound by 40 percent in the first quarter of this year.
That prediction has turned out to be the most accurate after the Central Bank of Egypt (CBE) finally bit the bullet and devalued the currency by 38 percent to 50 EGP per US dollar from 30.8 EGP. The CBE said it will allow the currency trade freely against the dollar from hereon.
While the devaluation was widely expected, it was the action that preceded it that caught many off guard and may prove the difference in whether Cairo’s latest devaluation pays off.
In an unscheduled meeting on the same day the currency was devalued, the CBE hiked interest rates by a record 600 basis points in one fell swoop, its biggest rate hike yet.
Analysts and investors say the central bank was laying the groundwork for a successful currency float by first raising interest rates by a record before devaluing the pound.
This was done in realisation of the fact that devaluing the currency may not be sufficient to lure dollars into the economy if interest rates were not raised to make local debt attractive to foreign investors.
“Egypt learnt how not to float a currency from Nigeria,” a foreign investor who did not want to be named told BusinessDay.
“By first raising market rates before devaluing the pound, Egypt didn’t put the cart before the horse like Nigeria did,” the investor said.
Nigeria has also had to devalue the naira twice in the space of nine months but the gains have been thin.
The first devaluation was in June following the election of President Bola Tinubu who wasted no time in delivering bold reforms that had been stuck for years.
Experts have said the reforms are needed to put Africa’s most populous nation on track but were hurriedly made without considering its ripple effects on the citizens, especially the vulnerable.
The naira devaluation in June which paved the way for a 40 percent decline in the currency should have been preceded by a number of moves that the CBN is belatedly implementing.
Monetary experts have roundly commended the move but are of the view that floating the naira should never have come before the monetary tightening the CBN is now embarking on while measures should have also been put in place to boost dollar supply.
“Before floating naira, which by the way is a good move, the CBN should have started mopping the excess naira liquidity in the market,” a leading Nigerian economist who did not want to be named said.
“Secondly, there should have been plans to attract the required amount of dollars necessary to ensure the CBN can intervene in the market whenever the naira was under undue pressure,” the economist said.
Nigerians are bearing the brunt of the poorly planned reforms despite their long term gains, with inflation peaking at a 19-year high of 29.9%, businesses shutting down and unemployment rising.
The tough times won’t last, however, according to Benedict Oramah, president of the African Export-Import Bank (Afreximbank), reforms were necessary to revamp the country’s economy, stressing that things will soon return to normal.
“Nigeria’s choice to float the Naira and remove petrol subsidy are the right decisions,” said Oramah.
“Once you have been able to stabilise the exchange rate, prices will adjust, markets will adjust, and things will return to normal,” he added.
Time will tell if Egypt did the right thing but first hiking rates before the devaluation. In the meantime, Nigeria is learning the hard way to be more deliberate and coordinated with policy actions. (BusinessDay)
