Dubai- Masaader News
Egypt’s pound slid 13.5 percent to a record low against the dollar on Thursday as authorities announced a $3 billion International Monetary Fund deal with a commitment to a “durably flexible exchange rate regime.”
The central bank also raised interest rates by 200 basis points in an out-of-cycle meeting, saying it aimed to anchor inflation expectations and contain demand-side pressures.
Egypt had been in talks with the IMF for a new loan since March after its economic woes deepened due to the war in Ukraine. The fund has long been urging Egypt to allow greater exchange rate flexibility.
In a statement confirming a $3 billion, 46-month Extended Fund Facility, the IMF said a flexible exchange rate regime should be “a cornerstone policy for rebuilding and safeguarding Egypt’s external resilience over the long term.”
It said the deal was expected to catalyze a large, multi-year financing package, including about $5 billion in the fiscal year ending June 2023, reflecting “broad international and regional support for Egypt.”
Egypt’s central bank said it was intent on intensifying economic reforms and had “moved to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the EGP against other foreign currencies.”
The pound weakened rapidly to around 22.75 to the dollar from 19.67, data from Refinitiv showed.
The bank had already allowed the pound to depreciate by 14 percent against the dollar in March, and the currency had been slipping more gradually in recent weeks. Former central bank governor
Tarek Amer, under whom the pound had long been held steady, was abruptly replaced in August.
Most of Egypt’s bonds were lifted up to 2 cents on the dollar on Thursday.
That left them at their highest level in about a month and up 10 percent roughly in price terms from lows hit at the start of the month.
Ukraine war impact
The war in Ukraine pushed up Egypt’s bills for wheat and oil while dealing a blow to tourism from two of its largest markets, Ukraine and Russia, a key source of hard currency.
In its statement on Thursday, the central bank said the conflict had “dire economic ramifications” and consequently led Egypt to weather large capital outflows.
Annual headline inflation accelerated to 15 percent in September, its highest in almost four years, according to official data.
The central bank said it would continue to announce inflation targets “along the predetermined disinflation path that began in 2017.” The bank’s existing target is 5-9 percent.
The 200-bps raise in rates brings the overnight lending rate to 14.25 percent and the overnight deposit rate to 13.25 percent.
The central bank also said that by December it would gradually phase out a rule that mandated the use of letters of credit for import finance.
The rule, an effort to preserve scarce dollars, had caused a major slowdown in imports of everything from consumer goods to industrial components, and had left some basic commodities stuck at ports.
In order to deepen the foreign exchange market and enhance its liquidity, the central bank said it would work toward building the foundations for a derivatives market.