Much-anticipated deal announced hours after Egyptian pound plunged following decision to freefloat currency
Egypt has finalised a deal with the International Monetary Fund to receive $8 billion in loans, Prime Minister Mostafa Madbouly announced on Wednesday.
It came hours after the Central Bank of Egypt increased interest rates and allowed the local currency to freely float with no interventions from the state.
The flotation, which was in discussions for months, was a key condition from the IMF to approve Egypt’s loan.
The fund reached an agreement with the Egyptian government in December 2022 to loan $3 billion over 46 months, of which Egypt received a first tranche of $347 million after signing the deal.
But since then, the country’s first review, scheduled for early 2023, stalled due to a delay in Cairo introducing reforms requested by the IMF, which included reduced public spending, the sale of state assets to foreign investors and a more robust private sector presence in the economy.
The increase in the size of the loan to $8 billion was intended to ensure the Egyptian government has enough foreign reserves to withstand the economic effects of freely floating the Egyptian pound.
The flotation has already caused the pound to drop to its lowest level in history on official markets, reaching about 52 pounds to the US dollar on Wednesday afternoon.
Since 2022, Egypt has devalued its currency three times but maintained controls to fix the exchange rate each time.
Wednesday’s decision is the first time the currency will be allowed to freely trade on currency markets.
The move came after the Central Bank of Egypt raised its overnight interest rates by 600 basis points at an unscheduled meeting and said it would allow the market to determine the exchange rate.
The devaluation was an attempt to unify the country’s official exchange rate and the rate on its parallel market, the central bank said in a statement.
The black market rate had been double the official rate for the past few months, exacerbating a continuing foreign-exchange crunch that has crippled the country’s import-heavy economy.
“The CBE is committed to continue the transition to a flexible inflation targeting regime. To ensure a smooth transition, the CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces,” according to the bank.
Following the flotation, the black market exchange rate has been changing at a fast pace.
On Tuesday, a US dollar was trading at 42 Egyptian pounds on the black market, one trader told media, explaining that by Wednesday morning, it had increased to 58 pounds before receding slightly to 52 in the early afternoon.
“This sort of fluctuation, both in the official and parallel rates, is entirely expected now that the pound will be allowed to freely float. It will continue responding to various kinds of market stimuli until both rates unify, which is the main goal with this move,” says financial analyst Mohamed Ragab.
After the interest rate increase, the central bank’s overnight lending rate stands at 28.25 per cent while the overnight deposit rate is 28.25 per cent.
The central bank said the rate increase is aimed at lowering inflation, which hit a record high of 38 per cent towards the end of last year but has since eased to about 35 per cent.
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