CAIRO/DUBAI/LONDON (Reuters) – Egypt’s pound has been a rare riser among emerging market currencies beaten down by the coronavirus fallout but pressure is growing on it to weaken.

An expected fall in remittances from Egyptians working in oil-rich Gulf countries, debt repayments and a collapse in tourism revenues and low global gas prices will put the country’s foreign reserves, already at their lowest level in over two years, under more strain, say economists and bankers, limiting the central bank’s room to manoeuvre.

Like monetary authorities in other emerging economies, Egypt’s central bank has kept the pound steady in recent weeks by using some of its foreign reserves, analysts said, as the coronavirus pandemic encouraged investors to ditch riskier assets.

A potential agreement with the International Monetary Fund (IMF) for financing could add to the pressure on the pound over the medium term, economists say.

The IMF’s general view is that the value of currencies is best determined by markets, despite Kristalina Georgieva, the new head of the Fund, saying recently that flexible exchange rates may not always be the most suitable shock absorber for developing economies under stress.

“Risks have increased of some near-term adjustment,” said Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, adding that he expected Egypt to focus on keeping the pound stable for now.

“We have heard concerns that a new IMF programme may require greater pound flexibility in the medium term as well but the evidence would suggest that pound stability and an IMF programme are not mutually incompatible.”

The IMF declined to comment, referring to a statement on Sunday confirming a request from Egypt and praising authorities for the measures they had taken to counter the COVID-19 impact.

Egypt’s state press center did not respond to questions from Reuters, referring instead to a statement from Prime Minister Mostafa Madbouly on Sunday announcing that Egypt would seek assistance from the IMF to keep supporting the country during extraordinary circumstances.

The central bank did not respond to requests for comment.

Egypt’s pound has risen around 2% this year against the dollar – one of the few developing currencies to clock gains. Mexico’s peso and South Africa’s rand have tumbled 20% each.

Analysts at Bank of America estimate that the Egyptian pound is nearly 15% over-valued against the dollar. The currency has traded in a fairly tight range since mid-March.

“Heavy intervention has enabled the exchange rate to behave like a peg, essentially constant at 15.75 against the U.S. dollar since mid-March,” said Phoenix Kalen at Societe Generale.

Meanwhile, Egypt’s foreign reserves have taken a beating, falling by around 10% to $40 billion in March, according to official data – a rate of decline which economists say is unsustainable. Among emerging markets, only Turkey saw a higher percentage fall in foreign reserves in March, according to data from the Institute of International Finance.

“The strategy of drawing on reserves to manage the currency is not sustainable,” said Callee Davise, economist at NKC African Economics. “It will cause the Egyptian pound to become increasingly over-valued – implying depreciation over the medium term.”

In a statement on April 7, Egypt’s central bank said it had drawn down its foreign reserves “to partially cover foreign portfolio investment outflows … and accommodate for the domestic market’s foreign currency needs to import strategic goods, as well as for the repayment of external debt service obligations.”

DEVALUATION

Egypt’s shrinking stockpile of foreign exchange highlights the central bank’s dilemma as it seeks to prioritise price stability and living standards while grappling with sluggish growth. The IMF has estimated the economy will expand just 2% in 2020 – a sharp drop from 5.6% last year.

Investor outflows have contributed to the strain on foreign exchange reserves. At least $10 billion in Egyptian pounds, treasury bills and bonds left Egypt in March, according to finance ministry and central bank data.

The last time Cairo agreed a deal with IMF, in 2016, it agreed to let the pound float, prompting a 50% devaluation. In return the government received a $12-billion-dollar loan.

In the turmoil that followed the toppling of former president Hosni Mubarak in 2011, the central bank burned through its forex reserves to support the pound, hitting a low of $13.42 billion in 2013.

Egypt’s finances are in much better shape than in 2011. The IMF deal slashed energy subsidies and implemented a value-added tax to help cut the deficit, winning the plaudits of investors.

“The Egyptian economy has been able to hold steady thanks to the measures taken over the last four years. This can clearly be seen in the availability of commodities and the lack of upheaval in the currency market,” Madbouly said on Sunday.

But like other emerging markets, Egypt’s bonds have come under pressure in recent weeks. The cost of insuring its sovereign debt against the risk of default has climbed to well above 600 basis points – the highest levels since September 2013, IHS Markit data shows.

Egypt also has to repay a $1 billion eurobond due to mature on April 29 as well as $1.824 billion in coupon payments on its hard currency debt in 2020, JPMorgan calculated.

With dollar-bond yields trading at around 8% in the wake of the recent market rout, tapping international capital markets looks too costly for Egypt as well as many other emerging markets.

“If policymakers try to support the pound for an extended period, this risks repeating the problems that in 2016 led to a 50% fall in the currency,” said Jason Tuvey, senior emerging markets economist at Capital Economics, who expected the pound to weaken 7.5% this year.

“Turning to the IMF means that the authorities are likely to loosen their grip on the pound sooner rather than later.”