Egypt agreed with the International Monetary Fund on November 11, 2016 for a $12 billion loan in exchange for a series of economic reforms. These have already fundamentally transformed the Egyptian economy, particularly and most recognizably, depreciating the Egyptian pound against the U.S. dollar. The reforms package won praise at home and abroad for its foreign exchange market liberalization. Yet this move, which allows the price of the Egyptian pound to be determined by market forces instead of the Central Bank of Egypt (CBE), resulted in the pound-to-dollar exchange rate falling from EGP 8.88 to the dollar in early November to more than EGP 19.50 by late December.

While the pound has recovered slightly, currently standing at about EGP 18.45 to the dollar, the average Egyptian lost over half of their savings and had their monthly income cut substantially. Given Egypt’s dependence on imports, the devaluation of the pound in dollar terms also drove up the already troublingly high rate of inflation, with year-on-year core consumer price index (CPI) inflation hitting 20.73 percent in November 2016 and 25.86 percent in December.

The inflation levels are likely to die down once the effects of the currency float and subsequent devaluation have had enough time to filter through the economy. Right now, however, the most pressing question is whether the price of the pound will ever bounce back.

Prior to the IMF loan agreement and the concurrent efforts to liberalize the foreign exchange market, the CBE used to auction off roughly $120 million each week to the various domestic banks in Egypt at a fixed exchange rate. The domestic banks would then resell the dollars to their corporate clients to import goods and services from abroad and, in the case of multinational corporations with headquarters outside of Egypt, move profits out of the country. Once the supply of U.S. dollars had been spent, the only options available were currency traders or the black market exchange bureaus. For companies wishing to make larger transactions, buying dollars on the street was not feasible.

Since the reforms, the CBE has been is relying on foreign currency inflows to supply the interbank market. With the exception of one auction on November 3, when the shock liberalization took place, individuals and corporate banks could only obtain foreign currency on the interbank foreign exchange market. While there have been rumors that the CBE may make some reserve foreign currency available to the interbank market, this has yet to happen.

The thinking behind this move was that by abruptly stepping away from the foreign exchange market, the pound would depreciate naturally until supply and demand achieve equilibrium. As the value of the pound falls to a more natural level, domestic assets become more attractive to foreign investors, who can now buy more with their dollars. While neither the CBE nor the IMF was expecting the value of the pound to fall as much as it did, the consensus in the business community has been that the Egyptian pound will appreciate in the coming year, for a number of reasons.

Sudden currency depreciations are often followed by gradual appreciations, an effect known as “overshooting.” When a currency rapidly depreciates, domestic prices are often slow to adjust to the new value of the domestic currency despite the rapid adjustments seen in financial markets. Additionally, import needs are often fixed in the short term due to contractual obligations and the lack of domestic substitutes. The demand for foreign currency falls in the long term as domestic businesses are able to ramp up production of substitutes for imports, and foreign investment increases due to lower costs of inputs needed for producing exports.

Moreover, while the CBE has formally stepped out of the foreign exchange market, the amount of its reserves strengthens the credibility of the Egyptian government. As the announced macroeconomic reforms are implemented and the IMF loan tranches are delivered, reserve levels will rise. Already, reserves have hit $26.36 billion—a level not seen since 2011—and the IMF expects them to reach the Mubarak-era levels of $33 billion by fiscal year 2018–19. By boosting reserves higher than they were expected to reach, Egypt’s economy will be seen as a better environment for foreign investors, which will increase demand for the pound and push its price up.

Higher reserves have already allowed Egypt to begin repaying foreign creditor nations and international firms—a strong indication of financial stability. When the Egyptian government put dollar-denominated bonds on sale on January 29 with the initial intention to sell $2.5 billion, investor turnout was high enough to sell $4 billion worth. As Egypt develops a more accommodating and attractive investment environment under the reform program, the country may also begin exporting natural gas toward the end of the decade. Egypt’s natural gas production is expected to climb from 3.8 billion cubic feet per day (bcfd) in summer 2016 to 7.7 bcfd in three years. While Egypt still consumes 5.2 bcfd, the anticipated excess gas can then be exported to the international markets. This will increase Egypt’s heavy industry and manufacturing export potential once natural gas shortages are resolved and reduce Egypt’s demand for foreign natural gas imports, further increasing demand for the pound.

The prospects for Egypt’s long-term economic growth are promising, and the reforms have already begun to attract substantial foreign investment. But despite this case for optimism, there are other factors that should bring pause to investors considering the currency as a low risk asset or consumers expecting a rebound in value any time soon.

One such factor is the continued tightening of U.S. monetary policy. The Federal Reserve raised fund rates at the end of 2015 for the first time in nine years and followed that up with another rate increase at the end of 2016. While the most recent rate increase largely spared the emerging markets, including Egypt, the December 2015 increase made them comparatively less attractive to investors, pushing emerging market stocks down 20 percent between November 2015 and January 2016.

Also, there are several indicators that Egypt’s pent-up demand for dollars does not reflect the broader potential needs of the market. While the eventual aim of the CBE and IMF is to have a fully functioning foreign exchange market with relatively free flows of capital in and out of the country, Egyptian banks have thus far been somewhat stingy with their distribution of hard currency. This has resulted in a substantial backlog of foreign exchange requests needed for imports. Local media reported in mid-January that Egyptian banks were taking up to 70 days to meet foreign currency requests for manufacturing production inputs and Egyptian companies were still sourcing anywhere from 15 to 100 percent of their foreign exchange needs from the black market. Additionally, at the end of November, the Egyptian government suggested that it would allow banks to release dollars for the purpose of repatriating profits, but there has been little evidence of this. Instead, importers of basic goods, such as foodstuffs and medicine, are still given priority when it comes to foreign currency—and it appears that even top investors are unsure of what the CBE’s current rules are for profit repatriation.

This means that the demand for U.S. dollars may be substantially larger than what Egyptian companies have requested so far, and any upward pressure on the pound will almost certainly be counteracted by this demand for dollars. The present realized demand is largely coming from companies that need the dollars for basic goods, and it does not reflect the full extent of the Egyptian market’s need for hard currency once one factors in importers of non-essential goods and multinationals looking to move profits out of the country. In other words, the restrictions on the uses of dollars have likely suppressed demand because companies that are effectively prohibited from using dollars are not currently in the market for them.

According to the IMF extended fund facility report, Egypt is aiming to have a fully functioning foreign exchange market by June 30. That will mean lifting the $100,000 restriction on individuals’ dollar transfers abroad and the $50,000 limit on cash deposits for importing non-essential goods. As more restrictions on the use of foreign currency in Egypt are lifted, the downward pressure on the pound may increase, cutting further into the savings and salaries of most Egyptians.

Any appreciation to the Egyptian pound would certainly be a great boon to the economy and Egyptian consumers, but it is not clear that it will take place any time soon. However, future fiscal responsibility and a continuation of the IMF reform package will make the economy of Egypt stronger in the long run and, as a result, strengthen the Egyptian pound. As the most populous Arab country, Egypt has the greatest economic potential in the Middle East, and a healthy, diversified, and inclusive economy is key to unlocking that potential.

Brendan Meighan is a macroeconomic analyst focusing on the Middle East. Follow him on Twitter @BrendanJMeighan​.