Youssef Jamal Al-Din | CNBC
The Egyptian pound hit a record low against the dollar on Wednesday after the central bank raised interest rates by 600 points and devalued the currency.
These steps aim to facilitate reaching an agreement with the International Monetary Fund, which is expected to confirm the extension of the current financial support package of $3 billion for Egypt.
The Egyptian pound was trading at about 50 pounds to the dollar after the announcement, from 30.85 pounds previously, according to data from the London Stock Exchange. The central bank said on Wednesday that the country's key interest rate now stands at 27.25%.
James Swanston, an economist for the Middle East and North Africa at London-based Capital Economics, said that this development “shows that policymakers are committed to returning to economic orthodoxy. This is likely to pave the way for reaching an agreement with the International Monetary Fund within hours.” . Research note.
“This appears to be a positive step for Egypt on the way out of its current crisis,” he wrote.
Egypt, the most populous country in the Arab world with a population of about 110 million, faces a long-term shortage of foreign currency. The country's moves indicate that it is confident that hard currency inflows are on the horizon, especially from a $35 billion investment agreement signed last month with the United Arab Emirates and an expected agreement with the International Monetary Fund for further support.
The Central Bank of Egypt said in a statement following the Special Monetary Policy Committee meeting on Wednesday that the local economy has recently been affected by a shortage of foreign exchange, which has led to the existence of a parallel market for the exchange rate and restricted economic growth.
Cairo has pledged on previous occasions to allow its currency to circulate more freely, but it will intervene to control the pound when it declines.
The central bank said: “The announced measures were adopted as part of a set of comprehensive economic reforms in coordination with the government, and with the firm support of multilateral and bilateral partners.” “In preparation for the successful implementation of these measures, sufficient financing has been secured to provide foreign exchange liquidity.”
Analysts at S&P Global Market Intelligence expect further monetary tightening in 2024 to combat inflation and offset price increases caused by the weakness of the Egyptian pound. They expect inflation to reach about 30.3% this year, down slightly from 33.9% in 2023. They expect the rate to fall into the teens in 2025, but only reach single digits by 2027.
The Egyptian Monetary Policy Committee said in its comments that it “believes that this tightening will bring the monetary position to a sufficiently restrictive level to stabilize inflation expectations, and will continue as long as this is necessary to achieve the desired inflation reduction path.”
