08:00 PM
Thursday 07 March 2024
Written by Manal Al-Masry:
Simon Williams, chief economist at HSBC Bank, said that they are optimistic about the package of decisions issued yesterday – Wednesday, to liberalize the exchange rate and raise the interest rate – in addition to the International Monetary Fund’s pledges to provide broad financial support to Egypt.
HSBC, one of the largest international banks, explained in a report issued today: “Masrawy received a copy of it” that these decisions may open the beginning of a new cycle for Egypt, and pave the way for economic stability and an eventual return to growth.
Yesterday, Wednesday, the Central Bank of Egypt announced a return to exchange rate flexibility – floating the pound against the dollar – with its price determined according to market mechanisms – supply and demand.
The Central Bank explained in a statement yesterday that unifying the exchange rate – eliminating the black market – is a very important measure, as it contributes to eliminating the accumulation of demand for foreign exchange after closing the gap between the official and parallel market exchange rates.
The price of the dollar in banks rose from 30.94 pounds on Tuesday to 50 pounds during trading yesterday, Wednesday, before it began to decline.
The average price of the dollar at the end of bank transactions today, Thursday, was 49.34 pounds for purchase and 49.44 pounds for sale, according to the Central Bank of Egypt website.
Chief economist Simon Williams explained that the official value of the pound recorded a decline of about 40% against the dollar yesterday, which is the largest of the four devaluations that Egypt witnessed during the past two years.
While the central bank’s interest rate increase by 600 basis points exceeded their expectations, according to Simon.
Yesterday, the Central Bank raised the interest rate by 6% in an extraordinary meeting of the Monetary Policy Committee yesterday, recording the interest rate at 27.25% for deposits and 28.25% for lending, with the aim of containing inflationary pressures resulting from liberalizing the exchange rate.
Egypt had devalued the pound against the dollar 3 times during the last two years, the last of which was in March 2023, before it returned to the flexibility of the exchange rate again in the fourth wave, starting yesterday.
Simon Williams explained that the foreign exchange movement has already closed the gap between the parallel and official market rates.
The gap in the price of the dollar in the parallel market and banks had reached more than 130% in previous times before the gap between the two prices disappeared from yesterday and today, according to what sources Masrawy spoke to said.
Some observers whom Masrawy spoke to observed an increase in the reluctance of individuals and companies to sell the dollar in banks and money exchanges, which led to the unification of the exchange rate and the return of foreign exchange flows to the arteries of the official banking sector.
He added that the increase in the interest rate contributed to turning the real return on investment in the pound positive, according to Simon.
HSBC maintained its previous expectations that the exchange rate of the pound against the dollar would stabilize in the range of 40 and 45 pounds, according to the bank’s report.
According to Simon, they have noted that restrictions on foreign exchange have already been eased, and he hopes that dollar flows will re-establish the interbank market and put an end to the parallel market.
He expected the return of remittances and portfolio flows to the Egyptian market after unifying the exchange market.
Foreign funds returned to the Egyptian market significantly again yesterday, Wednesday, to invest in the Egyptian pound for the first time in a year after the Central Bank returned to liberalizing the exchange rate, according to what three bank presidents said.
Price stability
Simon expected a slight rise in the inflation rate in the short term, expecting prices to stabilize in the second quarter of this year, providing room for an interest rate cut – easing some monetary tightening – before the end of the year.
Hassan Abdullah, Governor of the Central Bank, said in a press conference yesterday that he aims to contain inflation and bring it down to a single number, not the exchange rate, explaining that inflation is the most vicious disease of the economy.
International Monetary Fund
Simon explained that the most important thing is that these measures taken by Egypt are linked to a broader set of policy commitments stipulated in the International Monetary Fund program that was agreed upon yesterday.
The Fund’s program with Egypt includes pledges to contain financial abuses, in addition to linking monetary policy and the foreign exchange system to the inflation targeting system.
Yesterday, the International Monetary Fund announced an increase in the value of the loan with Egypt from $3 billion to $8 billion, with the aim of making the Egyptian economic reform program a success.
The chief economist at HSBC Bank explained that this amount not only stimulates Egypt’s commitment to its pledges with the Egypt Fund, but when it coincides with an investment deal worth $35 billion that was signed with the UAE in February, it increases the probability of fulfilling it.
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