Egypt has floated its currency and announced an agreement with the International Monetary Fund to expand its rescue credit from $3 billion to $8 billion to support its economy.
The Egyptian pound has been floated and the primary interest rate has been raised by 600 basis points to 27.75%. The move was part of the IMF’s main requests to raise the $3 billion rescue credit agreed to in 2022. The central bank’s actions aim to counter inflation and attract foreign investment.
The pound started to fluctuate after the announcement and lost more than 60% of its value in relation to the dollar in a matter of hours. Commercial banks were exchanging US dollars for almost 50 pounds for $1 by the end of the day, up from about 31 pounds.
International markets determine the value of a floating currency daily, rather than governmental decrees. This enforces discipline, as investors tend to purchase currency from countries with sound economic policies, increasing its value. Conversely, the market often avoids poorly run countries, penalizing those with large deficits or inflation-fueled money issues. When a government sets its currency’s value above market value, such as in Egypt, black markets arise.
The Egyptian economy has been severely impacted by government austerity, the coronavirus pandemic, Russia’s invasion of Ukraine, and the Israel-Hamas war in Gaza. The Houthi attacks on Red Sea shipping routes have reduced Suez Canal revenues, a major foreign currency source, and forced traffic away from the canal.
Egypt, the world’s largest wheat importer, is financially vulnerable due to the Ukraine war, which has forced it to rely on foreign food for its over 104 million population.
The Central Bank of Egypt (CBE) plans to close the currency illicit market and reduce inflation, which has reached unprecedented levels, with the yearly inflation rate exceeding 31% in January.
The Central Bank of England (CBE) plans to maintain inflation as its nominal anchor, allowing market forces to determine the exchange rate.
Additionally, the authorities stated that the CBE had been able to “secure funds” for market requirements, a sign that they anticipated a stabilisation of the exchange rate.
Governor of the central bank Hassan Abdalla said during a press conference, “We have enough foreign currency to meet our debts, especially since the reunification of the exchange rate.” According to him, the CBE’s main goal would be to reduce two-digit inflation.
“We are prepared to take any steps to fight inflation,” stated the president.
Egypt has received $35 billion from a multibillion dollar deal with an Emirati consortium to jointly develop the Mediterranean city of Ras el-Hekma. The deal is expected to further exacerbate the hardships faced by middle-class and poor Egyptians, who have already suffered from price hikes since the government’s 2016 reform program. Nearly 30% of Egyptians live in poverty.
Central bank measures led to an IMF agreement to increase a bailout loan from $3 billion to $8 billion, pending approval from the IMF executive board, set to meet this month.
The primary changes include a floating currency and a reduction in infrastructure spending to reduce inflation, according to Ivanna Vladkova Hollar, IMF mission chief for Egypt. “Egypt’s leaders are showing strong commitment to act swiftly on every critical component of their economic reform programme,” she said.
The new agreement, according to Egyptian Prime Minister Moustafa Madbouly, will allow the government to apply for loans from other lenders, such as the World Bank.
