Egypt devalues currency by over 30% after 600 bps interest rate hike

Egypt devalued its currency by approximately 35%, following a significant interest rate hike, amid the country’s most severe economic crisis in decades.

This comes as Central Bank of Egypt made a significant announcement on Wednesday, revealing a 600 basis point increase in interest rates during an unscheduled meeting.

In a strategic move aimed at economic stabilization, the bank has decided to allow the Egyptian pound to float freely, hoping to attract investment inflows from the Gulf.

Egyptian Pound faces sharp decline

As markets opened, the Egyptian pound faced a drastic drop against the dollar, plummeting from approximately 30.85 to over 45 pounds per dollar.

This devaluation, long anticipated by the market and a primary condition set by the International Monetary Fund, introduces a more flexible exchange rate system.

Shift towards a more flexible exchange rate

Despite previous statements favoring a flexible exchange rate, Egypt has historically reverted to tightly managing its currency amidst depreciation.

The current strategy appears to lean on substantial foreign currency inflows from investments, including a $35 billion agreement with the United Arab Emirates, to mitigate potential currency freefall.

Gulf investments

The Egyptian government is also progressing towards expanding its $3 billion support program with the IMF, bolstering the country’s economic framework.

Following the central bank’s decision, Egypt’s international bonds surged, highlighting investor confidence in the country’s economic direction.

Interest rates adjustment

The central bank has adjusted the overnight lending rate to 28.25% and the overnight deposit rate to 27.25%. This move is part of a broader strategy to combat inflation and stabilize the economy by allowing the exchange rate to respond to market forces.

Exchange rate unification

Central Bank of Egypt emphasizes the importance of exchange rate unification to address foreign exchange backlogs and maintain inflation targets.

Despite the bank’s efforts to defend the pound’s value against the dollar, the currency has experienced significant depreciation, highlighting the challenges in managing inflation and foreign currency shortages.

Emirati sovereign fund investment

The recent investment by the Emirati sovereign fund ADQ signals a positive outlook for the Egyptian economy, with $10 billion already transferred and additional funds expected.

However, concerns about Egypt’s commitment to structural reforms and reducing the economic dominance of the state and military remain.

The post Egypt devalues currency by over 30% after 600 bps interest rate hike appeared first on Invezz