The depreciation was accompanied by a surprise decision by the Central Bank of Egypt (CBE) to raise interest rates by one percent. In addition, 18 percent interest rate one-year investment certificates were suddenly up for grabs at Egypt’s national banks.

While in 2016 the state of the local economy was to blame for the reforms, this time it is the war in Ukraine. Given that no one knows when the global crisis brought about by the war will end, Prime Minister Mustafa Madbouli told a press conference on Monday that the government had no other choice but to plan for worst-case scenarios.

According to investment bank Prime Holding, “the global atmosphere necessitates a flexible exchange rate in order to maintain Egypt’s competency as a reliable emerging market.”

The CBE’s measures “target preserving foreign exchange liquidity in the domestic market for the sake of securing its needs amid the ongoing economic challenges,” CBE Governor Tarek Amer told a press conference on Monday.

By the end of trading on Tuesday the pound had settled at LE18.55 against the dollar compared to around LE15.8 before the decisions were announced.

“The free float of the pound maintains foreign reserves at an adequate level, protects the domestic and external balance sheets, and maintains the competitiveness of our exports, all of which will reflect on the credibility of our economy and on our credit ratings,” Sarah Al-Khishin, associate professor of economics at the British University in Egypt, told Al-Ahram Weekly.

On the downside, however, the weaker pound will impact inflation forecasts. While inflation had been below the CBE target rate of seven per cent, ±2 per cent, the depreciation will push inflation higher. Last week Prime Holding had anticipated inflation to average nine per cent in 2022 on the back of the Covid-19 pandemic and uncertainty over when and how current geopolitical tensions in Eastern Europe will end. But there will, too, as Al-Khishin pointed out, be seasonal upwards pressure on inflation in Egypt as the holy month of Ramadan approaches and demand for food items increases.

The ramifications will vary from family to family. Following the drop in the value of the pound Sherine Nour ruled out her plans to buy a new car. Although she had already made a down payment on the promise that prices will not increase, she now expects that they will. Nour is on point. Investment bank Al-Ahly Pharos has already reported that a leading local car manufacturer has increased the selling price of one of their main brands by LE30,000-50,000.

The government is trying to monitor the market in an attempt to ensure traders do not take advantage of the situation to overprice goods, and has announced an LE130 billion package to protect the most vulnerable groups as well as the business, industrial, and financial sectors against the repercussions of the current global crisis.

The package includes an allocation of LE2.7 billion to the Takaful and Karama social protection programmes, sufficient for them to expand to cover an additional 450,000 families. Pensions are being increased, and the income tax threshold has been raised by 25 per cent. Public servants will receive their annual pay rise, which is usually disbursed in July, in April, with increases ranging from eight to 15 per cent.

While citizens will feel pain in their pockets, the devaluation of the pound is sound economic policy on part of the government. It is a move that the International Monetary Fund (IMF) will welcome, and could pave the way for additional support from the fund within the next month or two, Charles Robertson, chief economist at investment bank Renaissance Capital, wrote in a note on Tuesday.

There were reports last week that Egypt has begun talks with the IMF over a new financing package. London-based research house Capital Economics said fresh financial assistance from the IMF will help reassure investors over Egypt’s commitment to orthodox macroeconomic policymaking, saying: “We think the devaluation has brought the currency much closer to fair value and if it is now allowed to move more freely, that would be a positive sign that policymakers have learnt their lesson.”

Robertson expects Saudi Arabia and other Gulf states to be willing to help out. Indeed, some help has already arrived in the form of stock market investments. And earlier this week, Bloomberg reported that the state had agreed to sell $2 billion worth of its holdings in five-listed companies. The first of the deals, involving the sale of government shares in Egypt’s largest private bank, Commercial International Bank, and in e-payments platform Fawry, to the Abu Dhabi Wealth Fund, was announced on Monday.

The announcement, together with the government’s decision to reduce the capital gains tax on gains made from initial public offerings by 50 per cent for the next two years, with the promise of more incentives to come, pushed the EGX30 to gain five per cent on Monday, the biggest single-day gain since 22 March 2020. This was followed by a 1.6 per cent surge on Tuesday.

The decision to increase interest rates for the first time in close to five years is intended to attract foreign interest back to Egypt’s debt market. The decision came amid foreign outflows of as much as $15 billion from the local debt market in the past three weeks, according to Bloomberg. The flight was driven by the Federal Reserve’s — though it was not alone among central banks — decision to raise its benchmark federal funds rate for the first time since 2018.

Foreign investors will be questioning whether the currency has moved enough to warrant bringing them back in, Robertson wrote. He noted, however, that local investors are likely to flock to fixed income instruments now that one-year certificate of deposit rates have been hiked from 11 per cent to 18 per cent, and deposit and lending rates by 100 basis points to 9.25 per cent and 10.25 per cent respectively. The CBE will hike interest rates by a further 2.5 per cent, taking the overnight deposit rate to 11.75 per cent by the end of next year, predicts Capital Economic, because headline inflation is now likely to rise more quickly than they thought.

Banking expert Hani Abul-Fotouh says tightening Egypt’s monetary policy with interest rates hikes will contribute to curbing foreign investments outflows. He also expects the CBE to raise interest rates several times this year, an expectation many analysts share.

Increases in interest rates are not without their downside. They will raise the cost of internal debt, place pressure on the state budget, and slow down Egypt’s real GDP growth just as it was beginning to recover from the pandemic, says Abul-Fotouh. They will also raise the cost of lending for businesses and families at a time when the purchasing power is already weak, causing a significant slowdown in the domestic market. On Tuesday, the Planning Ministry revised its projections for the growth rate during fiscal year 2022-23 downwards, to 5.5 per cent from the 5.7 per cent it expected before the war began.