Egypt Devalues Currency, Hikes Interest Rates But Will Reforms Stick?

An $8 billion IMF rescue package and a $35 billion UAE-engineered investment deal end Egypt’s foreign currency shortage.

In early March, Egypt’s central bank hiked interest rates by 600 basis points, agreed to slow down infrastructure spending, and allowed the Egyptian pound’s value to plummet, in exchange for a $5 billion expansion of its preexisting loan package from the International Monetary Fund (IMF) to $8 billion. A floating exchange rate has been a longstanding demand of the IMF.

The latest IMF loan program comes on the heels of a massive deal by the United Arab Emirates (UAE), providing Egypt with $24 billion for land-development projects. Meanwhile, $11 billion in long-term deposits from the UAE, Kuwait, and Saudi Arabia with the Egyptian central bank will be invested in real estate and other projects. This influx of cash—combined with the IMF loan—has rectified the government’s foreign currency shortage, at least for now. The sharply devalued Egyptian pound will make the country’s exports, like cotton, more competitive and improve its trade deficit. However, it will also greatly diminish the purchasing power of a population of whom roughly 30% already lives in poverty.

The Egyptian central bank’s moves are an attempt to address several economic problems simultaneously: A shortage of foreign currency, drastically higher black market foreign exchange rates, and rampant inflation that sent the price of unsubsidized bread up by nearly 100% in just a year.

Whether the latest reform package Egypt has agreed to will stick—particularly the floating exchange rate—is unclear. Egypt’s government has historically followed a currency devaluation with a fixed exchange rate. Funds from the $3 billion December 2022 IMF loan package were never disbursed because the central bank never transitioned the pound from a fixed to a floating exchange rate as stipulated.

It remains an open question to what extent sharply increasing interest rates and moving to a floating exchange rate will facilitate the economic growth needed to sustain the massive levels of government debt accrued to finance Egyptian President Abdel Fattah El-Sisi’s ambitious investments in infrastructure. Israel’s war in Gaza has also harmed Egypt’s economy—tourism is down significantly, as is revenue from the Suez Canal thanks to Houthi attacks on Red Sea shipping. Remittances declined by approximately 30% in 2023 as Egyptians abroad reacted to the growing gap between the pound’s official and black market exchange rates.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button


Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.

100% secure your website.