Continuing its acceleration driven by the global economic crisis, Egypt’s annual headline inflation rose to 15.3 percent in September, up from eight percent in September 2021, hitting the highest level since recording 15.7 percent in November 2018.
The report projected the Egyptian pound to continue to weaken in coming weeks, ending the year close to EGP 21 against the US dollar.
Currently, the Egyptian pound is trading at its lowest level against the US dollar since the implementation of the IMF-backed economic reform programme in November 2016.
The decrease has been driven by the war in Ukraine and the country’s actions to stabilise the local market, including raising interest rates by three percent (300 bps).
The US dollar is trading at EGP 19.63 for buying and EGP 19.70 for selling, up from an average of EGP 15.5 prior to the onset of the war.
“We expect that depreciatory pressures on the majority of MENA currencies, that are not pegged to the US dollar, will persist in the next three to six months. Aside from country specific factors, stronger for longer US dollar will be the main source of downward pressure on the currencies in the region. Our America’s team expects the US dollar Index (DXY) will continue to appreciate, likely peaking over Q422 and Q123, driven by a hawkish US Fed and rising risk aversion. This will weigh on the Egyptian pound and exacerbate domestic pressures”, the report explained.
It also said that as the gradual adjustment of the currency is still holding, a strong US dollar and delays in reaching an IMF loan deal have led to a faster depreciation than it had expected.
These factors, along with an overall shortage of US dollars in the market, are expected to continue to maintain pressure on Egypt’s local currency, the report noted.
“Indeed, demand for US dollars on the black market will persist from individuals looking to hedge against a weaker pound and from businesses looking to finance their imports,” the report pointed out.
Meanwhile, the report expected that official and informal market rates will converge reaching EGP 21.5 against the US dollar before the pace of the depreciation slows.
“By then, the strength of the dollar will peak, the Egyptian economy will stabilise and capital inflows (FDI/portfolio inflows) start to materialise. The US dollar trading price will end 2023 at EGP 22,” according to the report.
Egypt is still in negotiations with the IMF to secure a fresh loan under a new economic reform programme in order to navigate the severe implications of the Russian-Ukrainian conflict.