Egypt allows the pound to fall to an unprecedented low and is close to reaching an agreement with the IMF
- The Egyptian pound fell to an unprecedented level on Wednesday after the Central Bank announced that it would allow the exchange rate to be determined “according to market mechanisms” and raise interest rates by 600 basis points in an extraordinary meeting, in new steps aimed at economic stability with the support of Gulf investment flows and the IMF program. International.
The Egyptian pound fell sharply against the dollar with the opening of the markets, so that the exchange rate during transactions exceeded fifty pounds to the dollar before falling from this level to about 49.50 pounds to the dollar, from the level of 30.85 to the dollar that Egypt tried for months to defend.
The move to implement a more flexible exchange rate is one of the main demands of the International Monetary Fund, and officials say that the government is close to expanding the current support program worth three billion dollars with the Fund.
Analysts welcomed the steps taken on Wednesday, saying they pave the way for completing the agreement with the Fund.
Cairo News Channel quoted an unnamed senior official as saying that Egypt would sign the agreement with the Fund within hours.
Egypt said in the past that it would move to a more flexible exchange rate, and that it would not return to managing the exchange rate except when the value of the pound collapsed.
This time, Egypt may be betting that hard currency inflows from investment projects, including a $35 billion deal signed with the UAE in late February, will prevent the pound from falling free.
Egypt suffers from a chronic shortage of foreign currency. The central bank said that its measures were “supported by bilateral and multilateral partners” and that “the necessary financing has been provided to support foreign exchange liquidity.”
Following the announcement, Tradeweb data showed that the country's international bonds rose after the central bank announced its decision, and longer-term bonds achieved gains of about four cents before giving up some of these gains. By 1200 GMT, bonds due in 2049 rose 2.3 cents to 83.25 cents.
The premium demanded by investors over US Treasury bonds, which are considered a safe haven, to hold Egypt’s international bonds decreased to 529 basis points, the lowest level since June 2021, according to JP Morgan data.
The Central Bank announced that it raised the overnight lending rate to 28.25 percent and the overnight deposit rate to 27.25 percent, as part of its decision to accelerate the monetary restriction process in order to accelerate inflation’s downward path, after it reached unprecedented heights last year.
He said in a statement, “The Central Bank affirmed its commitment to maintaining price stability in the medium term, as part of its keenness to fulfill the role assigned to it in protecting the requirements of sustainable development. To achieve this, the Central Bank is committed to continuing its efforts to shift towards a flexible framework for targeting inflation, by continuing to target Inflation as a nominal basis for monetary policy while allowing the exchange rate to be determined according to market mechanisms.”
* “Eliminate order backlog”
The shortage of foreign currency curbs commercial activity in the country and causes a backlog of goods at the ports and delays in payment for goods.
Remittances from Egyptians working abroad, the country's main source of foreign currency, slowed sharply amid expectations of a decline in the pound.
The war in Gaza and Yemen's Houthi attacks on ships in the Red Sea are endangering tourism revenues and traffic in the Suez Canal, two other important sources of hard currency.
The Central Bank said, "Unifying the exchange rate is considered a very important measure, as it contributes to eliminating the accumulation of demand for foreign exchange following the closing of the gap between the official and parallel market exchange rates."
The pound lost about half its value against the dollar from early 2022 when the foreign currency shortage crisis worsened, which came in a series of intermittent devaluations.
While the central bank set the inflation target, it was also seeking to manage the pound's exchange rate.
The announcement on February 23 that the UAE sovereign fund ADQ would pump $35 billion within two months as part of an investment deal to develop the city of Ras El Hekma on the northern coast of Egypt eased pressure on the Egyptian pound in the parallel market before the move to lower the exchange rate on Wednesday.
The Egyptian government says that ten billion dollars of these funds have already been transferred.
The government said last week that procedures to transfer current deposits in Egypt of another five billion dollars into the Egyptian pound have also begun, and the remaining funds are scheduled to arrive within two months of signing the deal.
In currency markets, the price of the pound in non-deliverable one-month futures contracts reached about 50 pounds to the dollar, which is in line with the price in spot transactions, but in 12-month futures contracts, the Egyptian currency recorded slightly more than 55 pounds to the dollar, which It indicates that the currency exchange rate may be subject to further changes in the currency markets in the coming months.
Kan Nazli, portfolio manager at Neuberger Berman, said that returning again to managing the exchange rate will limit the benefits of the decisions issued on Wednesday.
He said, "I believe that experience will be the best evidence, but there is a greater opportunity than before thanks to Emirati funding."
However, analysts say that doubts remain about Egypt's commitment to structural reforms that it has often postponed, including the liberalization of the currency exchange rate and the state and army relinquishing their control over economic activity.
In addition to arrears owed to foreign companies, the country also faces a heavy foreign debt repayment schedule.
The net deficit of foreign assets in the banking system, including the Central Bank, as of December 31 amounted to 841 billion Egyptian pounds, equivalent to $27.2 billion at the exchange rate at that time.