West News Wire: Following the announcement of a $3 billion International Monetary Fund (IMF) deal with a pledge to a “durably flexible exchange rate system,” the Egyptian pound fell roughly 14.5 percent to a record low versus the US dollar.
In an out-of-cycle meeting, the central bank also increased interest rates by 200 basis points with the stated goals of stabilizing inflation expectations and containing demand-side pressures.
Egypt had been negotiating a fresh loan with the IMF since March, when its economic problems worsened as a result of the conflict in Ukraine. Egypt has long been urged by the fund to permit more exchange rate flexibility.
In a statement on Thursday confirming a staff-level agreement on a $3bn, 46-month Extended Fund Facility, the IMF said a flexible exchange rate regime should be “a cornerstone policy for rebuilding and safeguarding Egypt’s external resilience over the long term”.
It said the deal was expected to catalyse a large, multi-year financing package, including about $5bn in the fiscal year ending June 2023, reflecting “broad international and regional support for Egypt”.
Egypt’s central bank said it was intent on intensifying economic reforms and had “moved to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the EGP against other foreign currencies”.
The pound weakened rapidly to around 23 to the US dollar from 19.67, data from Refinitiv showed. That was similar to the parallel market rate and indicated a currency float, Naeem Brokerage said in a note.
The bank had already allowed the pound to depreciate by 14 percent against the dollar in March, and the currency had been slipping gradually since May. Former central bank governor Tarek Amer, under whom the pound had long been held steady, was abruptly replaced in August.
Non-deliverable futures, which FX traders use to bet on moves in the currency over various timeframes, pointed to the pound falling to around 24 per dollar over the next three months and 26 per dollar over the next year.
Egypt’s international government bonds also gave back the gains they had made earlier in the day, which had lifted the price of most of them by more than 2 cents on the dollar.
The war in Ukraine pushed up Egypt’s bills for wheat and oil while dealing a blow to tourism from two of its largest markets, Ukraine and Russia, a key source of hard currency.
In its statement on Thursday, the central bank said the conflict had “dire economic ramifications” and consequently led Egypt to experience large capital outflows.
Annual headline inflation accelerated to 15 percent in September, its highest in almost four years, according to official data. Price rises, which come after years of austerity reforms under a 2016 IMF deal, have hurt many of Egypt’s 104 million population.
On Wednesday, the government raised the public sector monthly minimum wage by 11 percent to 3,000 Egyptian pounds, extended a freeze on residential electricity prices by six months to June 2023 and also extended food subsidy card benefits.
The central bank said it would continue to announce inflation targets “along the predetermined disinflation path that began in 2017”. The bank’s existing target is 5 percent to 9 percent.
The 200-basis-point raise in rates brings the overnight lending rate to 14.25 percent and the overnight deposit rate to 13.25 percent.