Yousef Gamal El-Din | CNBC
The Egyptian pound fell to a record low against the dollar on Wednesday after the central bank raised interest rates by 600 points and devalued the currency.
The moves were intended to facilitate an agreement with the International Monetary Fund that is expected to confirm the extension of its current $3 billion financial aid package for Egypt.
According to LSEG data, the Egyptian pound traded at around 50 to the dollar following the announcement, up from 30.85 previously. The country’s key interest rate is now 27.25%, the central bank announced on Wednesday.
The development “shows that policymakers are committed to a return to economic orthodoxy. This will likely pave the way for an IMF deal within hours,” James Swanston, Middle East and North Africa economist at Capital Economics in London, wrote in a research note.
“This appears to be a positive step for Egypt on its way out of the current crisis,” he wrote.
Egypt, the Arab world’s most populous country with around 110 million people, is facing a persistent foreign currency shortage. The country’s moves suggest it is confident that hard currency inflows are on the horizon, particularly on the back of a $35 billion investment deal signed with the United Arab Emirates last month and expectations of an agreement with the IMF for further support .
“The domestic economy has recently been burdened by foreign exchange shortages, which led to the existence of a parallel exchange rate market and slowed economic growth,” Egypt’s central bank said in a statement after the meeting of its special monetary policy committee on Wednesday.
Cairo had previously promised to make trade in its currency freer, but would still step in to control the pound if it fell.
“The announced measures were adopted as part of a series of comprehensive economic reforms in coordination with the government and supported by the unwavering support of multilateral and bilateral partners,” the central bank said. “In preparation for the successful implementation of these measures, sufficient funds have been allocated to maintain foreign exchange liquidity.”
Analysts at S&P Global Market Intelligence expect monetary policy to tighten further in 2024 to combat inflation and offset price increases due to the weakened Egyptian pound. They forecast inflation will reach about 30.3% this year, down slightly from 33.9% in 2023. They assume that the rate will drop into the teens in 2025, but will only reach single digits by 2027.
In its comments, Egypt’s Monetary Policy Committee said it “believes that this tightening brings the monetary policy stance to a sufficiently restrictive level to anchor inflation expectations and will be maintained for as long as necessary to achieve this.” to achieve the desired disinflationary course.”
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2024-03-06 14:00:17
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