The Egyptian pound plunged to a near all-time low, trading at EGP 19.27 to the dollar according to the Central Bank of Egypt’s (CBE) official rate on Thursday. It is also seemingly on its way to break, very soon, the record of 19.56 recorded on 20 December 2016 following its major devaluation.

“Over the next six months, the US dollar trading price against the Egyptian pound is expected to go over EGP 20, as inflation is accelerating and the key interest rates are projected to rise further, besides the NIR decrease,” economist Mona Bedair told Ahram Online.

Responding to the severe spillovers of the Russian war on Ukraine and the soaring global inflation, the CBE hiked the key interest rates twice at a total of 3 percent.

The first rise occurred on 21 March by 1 percent, leading to the devaluation of the Egyptian pound by 14 percent, from EGP 15.7 to the dollar to EGP 18.2.

On 19 May, the CBE hiked the key interest rates for the second time by 2 percent, and by the end of the month, the US dollar trading price against the Egyptian pound climbed to EGP 18.6.

Shortage of hard currency

The war in Ukraine, the elevating global inflationary wave, the US Federal Reserve’s (Fed) tightening policy and supply chain disruptions have weighed severely on the Egyptian economy, placing heavy pressure on its reserves of hard currency, which edged down by about 20 percent since the Ukrainian war broke out and caused a notable shortage in the US dollar in the local market.

Egypt’s NIRs, which started to recover from the negative impacts of a three-year COVID-19 pandemic, declined to $33.1 billion in July, down from $40.93 billion at the end of December 2021.

Moreover, $22 billion in indirect investments that focus on Egypt’s local debt instruments have fled the market, according to Minister of Finance Mohamed Maait.

This regression is fuelled by the Fed hiking the benchmark interest rates by a total of 2.25 percent (225 bps) in a bid to curb the elevating inflation, with likely a further 0.75 percent (75 bps) hike on the table in its September meeting.

On 18 August, President Abdel-Fattah El-Sisi named Hassan Abdallah as the CBE’s new acting governor, succeeding Tarek Amer, who had led Egypt’s monetary policy for seven years.

Inflation on the rise

The CBE’s Monetary Policy Committee (MPC) is anticipated to convene on 22 September to review the key interest rates in light of the local and global economic developments; particularly recent inflation readings. The meeting will be the sixth held in 2022 and the fourth since the Ukrainian war break out.

Egypt’s headline annual inflation sped up to 14.6 percent in July – more than double the corresponding month in 2021 – compared to 13.2 percent recorded in June, while urban annual inflation rose to 13.6 percent, according to the latest figures published by the Central Agency for Public Mobilisation and Statistic (CAPMAS) in August.

“As long as the Ukrainian war is escalating and Egypt’s trade deficit still exists, the US dollar is expected to appreciate more against the Egyptian pound,” Bedair added.

According to latest readings the CBE published in August, Egypt’s current account deficit stood at $13.6 billion in the first three quarters (July 2021-March 2022) of FY2021/2022, which ended in July 2022.

In May, Egypt’s trade deficit declined by 35.8 percent to $2.61 billion, down from $4 billion in the corresponding month of 2021, according to a report by CAPMAS published in August.

Bedair asserted that Egypt’s government needs to put a focus on attracting foreign direct investments (FDIs) and setting plans to improve manufacturing and industry policies for the sake of mitigating the current pressure on hard currency.

Meanwhile, former deputy chairman of BLOM bank Tarek Metwalli told Ahram Online that receiving the anticipated loan from the International Monetary Fund (IMF) will contribute to alleviating the hard currency shortage and restoring local market stability.

Prime Minister Mostafa Madbouly revealed in August that Egypt is in the final stage of arranging a new IMF loan.

“Interest rates are linked to the US dollar trading price in the local market and also to the Fed’s expected interest rate hikes through the end of the year. I believe that interest rates in Egypt may go up by a further 3 percent through the end of 2022, and this will be followed by depreciating the Egyptian pound further to exceed EGP 20 to the dollar before the end of 2022,” Metwalli explained.

The CBE’s MPC is scheduled to convene three times through the end of 2022; on 22 September, 3 November, and 22 October.

Import restrictions

The demand on hard currency is expected to soar even more, pushing further rises in the exchange rate if the government eases restrictions on imports, especially exempting certain items from the letter of credit (LC) imposed in February.

“Among the restrictions, the CBE has not allowed importers to provide the US dollar upon opening their LCs, hence making this its responsibility. If this regulation is maintained, the US dollar price will not increase because the CBE would still be able to control the demand. But if the importers are allowed to go on the market and provide their US dollar needs, this will fuel the demand for the US dollar and cause a price increase,” said banking expert Hani Abo El-Fotouh.