This week the Central Bank of Egypt hiked rates by 600 bps (6%), the highest hike in over twenty years rising to 27.25% and floated the Egyptian Pound, devaluating the currency drastically, causing it to lose over 56% of its value against the dollar. The overnight lending rate also rose 6% to 28.25%.
Key components in Egypt’s soaring inflation
Parallel exchange rates:
Parallel Exchange Rates occur when the official exchange rate is disregarded, and currency is usually exchanged at discounted and attractive rates through non-traditional dealers excluding official currency dealers and banks. Think of them as an unofficial or black-market currency rates.
Egypt is ranked as the sixth best value destination in the world and with almost 15 million visitors in 2023, tourism is a driving force in FX markets and may also be responsible for distorting prices. For instance, local vendors may choose to accept payment in terms of dollars rather than in the local currency. But with the ongoing war in Gaza and economic instability, tourism revenues are expected to fall.
Food Inflation
Egypt is the largest importer of wheat in the world and with almost over 60% coming from Russia 22% from Ukraine. It is no surprise that the conflict further amplified inflationary pressure
Supply chain pressure
Attacks by the Houthis in the Red Sea are a disruption to global trade and driving up container freight prices but even though the Houthis are not targeting Egyptian ships, trade is being rerouted away from the Suez Canal reducing foreign currency revenues for Egypt.
Intended Effects? and response
Egypt is an import driven economy and by devaluing the Egyptian pound, this is likely to reduce imports, improve BoP and encourage exports. Devaluation also means that Egypt has met the criteria of a flexible exchange rate set by the IMF to qualify for a bailout loan.
Wider Regional Developments
Egypt is taking on a mediatory role between Hamas and Israel, attempting to hold ceasefire talks which have broken down and are set to resume next week. Egypt is also facing a refugee crisis with an waves of Palestinian, Sudanese and Libyan refugees fleeing conflict entering an already struggling economy