Fitch Ratings logo (Photo: Reuters)
US-based credit rating agency, Fitch, found the devaluation of the Egyptian pound last week as credit positive but warns of higher inflation.
Last week the Central Bank of Egypt (CBE) devalued the pound by 14.4 percent against the dollar to 8.85, two days before re-strengthening it to 8.78 at an exceptional auction.
"This is more than a minor adjustment and takes the rate closer to the parallel market rate," said Fitch in a press release on Monday.
A limited supply of foreign currency had pushed investors and traders to hike demand on the dollar in the black market, pushing the unofficial exchange rate up to more than EGP 9.6 against the dollar before the devaluation.
Egypt has been suffering from a foreign currency crunch since the 2011 uprisings, which has been exacerbated by plummeting tourism revenues since the deadly crash of a Russian airliner over Sinai last October.
The rating agency warned that inflation is likely to rise as imports become more expensive, and that the central bank decision to hike interest rates 150 points to counter inflation would raise the government cost of borrowing.
Egypt's annual inflation rate eased to 9.5 percent in February from 10.7 percent in January, according to the official statistics agency CAPMAS.
"If constraints on the supply of foreign exchange persist around current levels, Egypt could turn to the IMF," said the ratings agency, adding that it believes an IMF loan would be within reach if requested by the Egyptian government.
Last month, Egypt lowered its economic growth forecast to a range of 4 to 4.25 percent for the current fiscal year ending on 30 June, down from 5 percent and raised its budget deficit forecast to a range of 11 to 11.5 percent of GDP, up from 8.9 percent.