Egypt Allows Its Currency to Fall Sharply Against Dollar, Hikes Interest Rates by 600 bps

The Egyptian pound slipped sharply against the dollar on Wednesday after Egypt’s central bank raised its main interest rate and said it would allow the currency’s exchange rate to be set by market forces. The measures by the Central Bank of Egypt were meant to combat inflationary waves and attract foreign investment as the country experiences a staggering shortage of foreign currency.

Following the central bank announcement, commercial banks were trading the US currency at more than 47 pounds by midday Wednesday, up from about 31 pounds per dollar. The central bank increased the key interest rate by 600 basis points to 27.75 per cent. The overnight deposit and lending rate were also raised by 600 basis points to 27.25 per cent and 28.25 per cent respectively, the bank said in a statement.

The Egyptian economy has been hit hard by years of government austerity, the coronavirus pandemic, the fallout from the war in Ukraine, and most recently, the Israel-Hamas war in Gaza. Cash-strapped Egypt is the world’s largest wheat importer, with most of its imports traditionally coming from eastern Europe. Since January 2022, the Egyptian pound has lost around 50 per cent of its value against the dollar.

The central bank said its measures Wednesday would help end the black market in currencies and slow inflation, which reached unprecedented levels in recent months. The annual inflation rate was over 31% in January, according to official figures. The CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces, the central bank said.

The rising cost of basic goods has deepened the hardships faced by middle-class and poor Egyptians. They have suffered from price hikes since the government embarked on an ambitious reform program in 2016 to overhaul the battered economy. Nearly 30 per cent of Egyptians live in poverty, according to official figures. Economists say the moves by the central bank were likely signs that the government is working to secure another financing package from the International Monetary Fund. Moving to a flexible exchange rate has been one of the key demands of the IMF.

James Swanton, an analyst with London-based Capital Economics, said they show that policymakers are committed to the turn back toward economic orthodoxy.” “This is likely to pave the way for an IMF deal within hours, he said.