The Egyptian pound lost about a third of its value against the dollar, on Wednesday, after the Central Bank decided to raise interest rates by 6 percent, in a new step that comes after a series of declines for the local currency.
The central bank said that it raised interest rates by 600 points, and that it would allow the exchange rate to be determined “according to market mechanisms.”
The price of the dollar in Egyptian banks reached about 50 pounds, after this announcement, according to the latest updates on the websites of Egyptian banks, and Al-Masry newspaper said, in its latest report, that the dollar exchange rate recorded 50.10 Egyptian pounds for purchase, and 50.20 pounds for sale.
This rise came after the price of the dollar stabilized in banks during the recent period at approximately 31 pounds.
Buying and selling gold…a haven for Egyptians to “stay in the safety zone”
In the past two years since it passed, speculators buying gold have descended on the market, as the collapse of the Egyptian currency has increased demand for gold as a safe haven from turmoil, according to a New York Times report.
This step represents an expected devaluation of the currency, given that applying a more flexible exchange rate was one of the main demands of the International Monetary Fund.
Cairo News Channel quoted a source it described as high-level, saying that the signing of the “new financing agreement between the Egyptian government and the International Monetary Fund is expected to take place within the next few hours.”
The price of the dollar reached more than 31 Egyptian pounds in January 2023, for the first time in the history of the Egyptian currency, after a series of declines witnessed over the past years.
Egypt has devalued its currency more than once in its history in response to crises, or in an attempt to reconcile supply and demand, in order to improve economic performance and increase its foreign currency reserves, which at the same time affected the living standards of citizens.
The following are the most prominent stations of the Egyptian pound against the dollar:
From one to seven pounds
Al-Masry Al-Youm newspaper says that in 1977, the late president, Anwar Sadat, decided to return import cards to the private sector, and begin the era of borrowing from the West, but with his inability to liberalize the general budget in 1977, the lack of continued flow of Gulf investments, and the general economic weakness, crises occurred for the dollar and the dollar moved. Officially from 1.25 pounds to about 2.5 pounds.
The second time of floating occurred in 2003 when the government of Atef Ebeid decided to liberalize the exchange rate in order to reduce the deficit in the trade balance and achieve a balance between supply and demand in the money market by increasing the supply of the dollar and other foreign currencies.
The price of the dollar at the time was 3.7 pounds (370 piasters), and it increased following the flotation to 5 pounds and 50 piasters, then it rose to about 7 pounds, then settled at 6 pounds and 20 piasters at that time.
At the end of Mubarak’s era, the price of the dollar was 5.77 pounds, then it rose after the events of the January uprising and the military council’s assumption of power to more than 6 pounds. By the end of Mohamed Morsi’s rule in July 2013, it had reached about 7 pounds, and continued to rise relatively until it reached To 8.8 when President Abdel Fattah El-Sisi took power.
2016.. A huge decline in the price of the pound
On November 3, 2016, Egypt witnessed a new currency float, causing the pound to lose about half its value against the dollar.
With this measure, the Central Bank abandoned the peg of its currency at 8.8 Egyptian pounds to the dollar in the hope of returning foreign currencies to the official banking system, after the scarcity of the dollar led to an inflated black market.
Given Egypt’s high interest rates, the stability of the pound and the currency’s track record of market-friendly moves, foreigners have pumped billions of dollars into its debt market.
The measure led to a sharp decline in the value of the pound immediately after the decision, reaching about 20 pounds, and then it was traded at about 17.6 to the dollar.
The floating of the pound caused a decrease in the value of salaries and a decline in the purchasing power of the population, with prices rising in many sectors, such as electricity, gas, dairy, steel, and construction.
However, foreign reserves increased, indicators of the outlook for the economy improved, growth increased, and the currency achieved some gains over time, settling at around 15.7 pounds to the dollar.
In 2019, the value of the pound increased by more than 11 percent in 2019, according to Reuters, and its price rose by about 199 piasters against the dollar.
Monette Doss, a macroeconomic and banking sector analyst, told Reuters that the rise in the value of the pound was “mainly due to the rapidly growing tourism sector, Egypt’s transformation into a net oil exporter and sustainable flows into Egyptian treasury bonds.”
In July 2021, the Egyptian Cabinet Media Center published a report on the gains more than 4 years after the exchange rate was liberalized.
The State Information Service said that the currency has overcome the consequences of the Corona pandemic on the global economy, and the pressure it generated on international currencies, thanks to “the economic and structural reforms that the state implemented over the years.”
The report revealed that the performance of the Egyptian pound against the dollar improved during the period from June 30, 2017 until July 28, 2021, by 13.1 percent.
The pound was able to gain a total of 2.65 pounds against the dollar from the end of 2016 until July 29, 2021, by 0.03 pounds in the period from December 31, 2020 until July 29, 2021, 0.31 pounds in 2020, 1.87 pounds in 2019, and 0.62 pounds in 2017. While it declined against the dollar by 0.18 pounds in 2018.
The report indicated that this strong performance of the pound was reflected in a decrease in the inflation rate to 4.9 percent in June 2021 compared to 29.8 percent in June 2017, which allowed the interest rate to be reduced to 8.25 percent at the end of June 2021, compared to 16.75 percent. End of June 2017.
“New flotation wave”
At the beginning of March 2022, the Statistics Authority announced that the annual inflation rate had risen to 10 percent for the month of February, recording the highest rate since mid-2019. This increase was attributed to a rise in the prices of food and beverages by 20.1 percent.
Then the central bank decided to increase the rate of return on lending and deposits by 1 percent.
He explained in a statement that the Russian-Ukrainian conflict led to “domestic inflationary pressures and increased pressure on the external balance. In light of these developments, the Monetary Policy Committee decided to raise the central bank’s key interest rates.”
He added that he “believes in the importance of exchange rate flexibility to serve as a tool to absorb shocks and maintain Egypt’s competitiveness.”
Then Egyptian banks were surprised by the devaluation of the pound against the dollar by approximately 17 percent. After the central bank statement, the pound fell 10.67 percent, reaching 17.42-17.52 against the dollar, according to Refinitiv data, after it had been trading at about 15.7 pounds to the dollar since November 2020.
Refinitiv data then showed a second decline, by more than 14 percent, bringing the pound down to 18.17-18.27 against the dollar.
At the time, some economists expected that a new wave of local currency flotation would take place in Egypt “in light of the rise in prices of primary commodities and food and the potential decline in the number of Russian tourists,” according to a report by investment bank J.P. Morgan.
Since March 2022, the pound has continued to decline against the dollar, and in August 2022, the Central Bank of Egypt offered the purchase price for the dollar at 19.01 pounds, a level to which the local currency has not fallen since December 2016 when the value of the dollar reached 19.3 pounds less than a month after the decision to liberalize the exchange rate. .
During 2022, Egypt suffered from a severe shortage of the dollar, and it was sold on the parallel market at prices much higher than the official price.
On October 27, 2022, the Egyptian pound touched its lowest levels ever at 22.5 pounds against the dollar, and the rise came after the Central Bank’s decision to raise the interest rate by 200 basis points.
After the Central Bank of Egypt pledged to switch to a flexible exchange rate under an agreement to obtain support from the International Monetary Fund, the Egyptian pound continued to decline against the dollar. The pound fell to a record level of 24 pounds against the dollar in just 3 days, while the price of the dollar on the black market rose to varying values, sometimes reaching 40 pounds.
In order to meet the need for the dollar, Egypt took measures, including reducing the limits of cash withdrawals and purchases outside Egypt.
In 2023, while the Central Bank of Egypt priced the dollar at about 31 pounds, the parallel market witnessed intense activity, after renewed demand for the dollar, which caused its prices on the black market to increase to the level of 40 pounds in August.
In November, the price of the dollar jumped in the parallel market to a new record level, despite the Central Bank of Egypt’s announcement of an increase in net foreign reserves, bringing its price to 50 pounds, while its official price in banks was still about 31 pounds.
Since the end of 2023, the exchange rate of the dollar against the pound has risen again, reaching more than 70 pounds before it later declines.
The exchange rate improved after talking about the approaching agreement with the IMF on a new loan and the “Ras El Hekma” project, and it fell to near 53 pounds, before falling by March to less than 50 pounds.
After the developments of recent days.. Is the dollar really “tottering” in Egypt?
In about two months, the exchange rate of the dollar against the Egyptian pound in the parallel market rose by about 30 pounds, bringing its price last Wednesday to about 73 pounds, while its official price is still 31 pounds.
After the Central Bank’s recent action, Reutzer said that Egypt may be betting this time that hard currency inflows from investment projects, including the Hekma deal, which was valued at $35 billion, will prevent a free fall of the pound.
On February 23, Egypt announced that the UAE sovereign fund would pump $35 billion within two months as part of an investment deal to develop the city of Ras El Hekma, which would ease pressure on the Egyptian pound in the parallel market.
The Egyptian government says that $10 billion of these funds have already been transferred. The government said last week that procedures to transfer current deposits in Egypt of another five billion dollars into the Egyptian pound have also begun, and the remaining funds are scheduled to arrive within two months of signing the deal.
However, analysts say that doubts remain about Egypt’s commitment to structural reforms that it has often postponed, including the liberalization of the currency exchange rate and the state and army abandoning their control over economic activity.
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