Egypt, a cash-strapped country, raises interest rates and permits its currency to plummet significantly against the dollar.
CAIRO (AP) — Wednesday saw a significant decline in the value of the Egyptian pound relative to the US dollar following the Central Bank of Egypt’s announcement that it would permit market forces to determine the currency’s exchange rate.
The country is facing a severe lack of foreign cash, thus the measures were intended to counteract inflationary waves and draw in 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 began trading US dollars at over 50 pounds per $1 by early afternoon, having previously traded them at roughly 31 pounds per dollar.
The benchmark interest rate was raised to 27.75% by the central bank by 600 basis points. The bank added in a statement that it had also increased the lending and overnight deposit rates by 600 basis points to 27.25% and 28.25%, respectively.
Years of government austerity, the coronavirus pandemic, the aftermath of the war in Ukraine, and most recently, the Israel-Hamas conflict in Gaza, have all had a significant negative impact on the Egyptian economy.
Egypt, the most populous Arab nation and the world’s largest importer of wheat, is financially vulnerable due to the war in Ukraine, which rocked the global economy and forced the country to purchase the majority of its food from other nations in order to feed its population of over 104 million.
The Egyptian pound has lost over half of its value in relation to the US dollar since January 2022.
The Central Bank of Egypt announced on Wednesday that it will take steps to assist put an end to the illicit currency market and reduce inflation, which has recently surged to previously unheard-of levels. Official data indicates that in January, the yearly inflation rate exceeded 31%.
“The CBE will persist in focusing on inflation as its theoretical foundation, letting market forces dictate the exchange rate,” the central bank declared.
Additionally, the authorities stated that the Central Bank had been able to “secure funds” for market requirements, indicating that they anticipated a stabilization of the currency rate.
The multibillion dollar agreement this week with an Emirati group to jointly develop the Mediterranean city of Ras el-Hekma, 350 kilometers (218 miles) northwest of Cairo, is thought to be the source of the funding, according to analysts. From that agreement, $35 billion will go to Egypt.
Egyptians in the middle class and lower classes are facing more problems due to the rising cost of necessities. Ever since the government launched a massive reform initiative in 2016 to revamp the faltering economy, they have been subjected to price increases. Official estimates place the number of Egyptians living in poverty at close to 30%.
The central bank’s actions, according to economists, were probably indicators that the administration was trying to get another IMF loan package. One of the IMF’s main requests has been to switch to a flexible exchange rate.
Capital Economics analyst James Swanton stated that they demonstrate “policymakers’ commitment to the return to economic orthodoxy.” Swanton is based in London.
He predicted that “this will likely pave the way for an IMF deal within hours.”