Egypt’s pound fell on Wednesday to a record low, the latest sign of the country’s foreign currency crisis two months after Cairo agreed to a $3bn bailout loan from the IMF.
The currency fell 6 percent to 26.4 to the US dollar in the steepest slide since Egypt’s Central Bank in late October devalued the pound in an effort to clinch an IMF deal.
Wednesday’s slide came as billions of dollars in imports were blocked at Egyptian ports because local banks were unable to secure enough cash to pay due to a shortage of foreign currency.
Russia’s invasion of Ukraine in February 2022 led to an outflow of $20 billion in flight to safety by foreign debt investors. The war also caused the price of raw materials to rise, dealing a severe blow to Egypt, the world’s largest importer of wheat.
The IMF pact includes a requirement that Egypt implement a “permanent transition to a flexible exchange rate regime” instead of using foreign currency reserves to maintain the exchange rate at a targeted level. The CBE devalued the pound in March, before the October move, with the currency losing 40 per cent of its value against the dollar over the period.
Mohamed Abu Basha, head of macroeconomic analysis at the Cairo-based investment bank EFG Hermes, said it was not immediately clear whether the fall on Wednesday represented an expected move to a flexible exchange rate regime.
“To judge, we need to monitor the level at which the currency will finally stabilize, which will lead to foreign currency liquidity in the banks and if we will see more volatility in the pound,” he said.
The central bank late last year abolished the need for importers to use letters of credit, a measure that began in March to conserve scarce foreign currency resources by reducing the import process.
Egypt’s government has consistently refused to move to a flexible exchange rate to avoid large jumps in prices in a country that depends on imports for many basic needs. But a shortage of foreign currency in recent months and the emergence of a black market in dollars have pushed inflation to 18.7 percent in November, the highest level in five years.
In December, the central bank raised interest rates by 3 percentage points in an effort to curb inflation. State-owned banks on Wednesday began offering one-year certificates of deposit at an interest rate of 25 percent – a move aimed at enticing savers to hold Egyptian pounds instead of converting them into dollars.
Analysts will be watching to see whether dollars will be available to clear the backlog of imports stuck at the port, which is equivalent to about $9.5bn, Mostafa Madbouly, the prime minister, said last month. These include items from corn and soy, used as animal feed, cars, industrial inputs and household appliances.
“Concerns have lingered about the authorities’ commitment to a flexible exchange rate but developments over the past week suggest that they are moving in the right direction,” said Capital Economics, a London-based consultancy.