Winners and losers of the CBE decisions

Doaa A. Moneim, Wednesday 13 Mar 2024

Al-Ahram Weekly looks at the pros and cons of the devaluation and high-interest rates.



Last week the Central Bank of Egypt raised interest rates by six per cent in one go, one of the highest hikes in the CBE’s history, if not the highest.

Economic consultant at IBIS Consultancy Ali Metwalli told Al-Ahram Weekly that the move accompanied a decision to leave the currency exchange market to be determined by market forces. By implementing these measures Egypt fulfilled the key remaining conditions for the delayed IMF reviews and for the increase of the IMF loan to $8 billion. 

The CBE faced challenges in raising the benchmark interest rate over the last six months due to concerns about its limited positive impact on the currency exchange market and the substantial effects it would have on the government’s debt service account and business operations, Metwalli told the Weekly.

Metwalli noted that foreign exchange shortages, persisting for nearly two years, fuelled speculative attacks on the currency, resulting in a black market rate that reached as high as LE70 for the dollar, representing a 130 per cent premium over the official rate. 

This overvaluation, rooted in speculation and economic uncertainty rather than a fair analysis of economic fundamentals, triggered significant inflationary pressures and posed risks to private investment growth, he noted.

Raising interest rates and the depreciation of the local currency are the CBE’s key tools to reducing exchange market pressure and ending black market activities, Metwalli said.

He said the $35 billion investment for Ras Al-Hekma, coupled with the expanded IMF agreement of $8 billion and $12 billion from the World Bank and the EU, as well as $1.2 billion from a facility that promotes environmental sustainability, Egypt can secure over $56 billion within the first quarter of 2024. That figure should support the CBE in meeting the country’s external financial obligations for at least two years as well as fight inflationary pressures effectively until the US starts cutting its interest rates, expected between the second half of 2024 and 2025, Metwalli explained.

For the Egyptian Stock Exchange, he said that the impact is likely to be positive because a large portion of the trading entities in the EGX are banks and financial institutions which naturally benefit from higher interest rates as they can charge higher interest on loans, leading to increased profitability and potentially higher stock prices. 

Other winners of the devaluation are exporting companies who could benefit from the currency depreciation to sell at cheaper prices in their target markets. But importing companies may face more challenges, though the end of the FX shortage and increased FX accessibility in the banking system are expected to mitigate the impact on importing companies, according to Metwalli.

However, he expected the recent six per cent interest rate hike to raise interest payments and debt repayment burdens for the government. He said the government deficit could go from seven per cent to GDP to nine per cent of GDP in 2024. 

“This heightened deficit will exert additional pressure on the government budget, necessitating prioritisation of spending on essentials and potential cuts to non-essential areas.” The investment budget is likely to bear the brunt, while social spending may be maintained to ensure social stability and support low-income households, Metwalli added.

However, he said that if the government follows through with IMF and international partner commitments on economic and fiscal reforms, a gradual decline in the fiscal deficit is anticipated, reaching six per cent by 2026.

He said the historical rate hike is commensurate with the economic challenges that Egypt faced in the last 18 months, according to Metwalli.

“The rate hike was partly to compensate for being unable to raise rates more aggressively in 2023, while speculative attacks on the currency were aggressively ongoing and produced the illegal black market rate,” he added.

Banking expert Hani Abul-Fotouh told the Weekly that the CBE’s decision to allow the exchange rate to be determined more freely by market forces will be reflected on the investment climate in the short term in different ways.

The currency exchange rate increase can lead to an increase in the cost of importing raw materials and equipment, affecting the operational costs of companies. Consequently, this can lead to reduced profitability and decreased investments by companies, Abul-Fotouh explained.

In the medium term, an exchange rate increase can attract more direct foreign investments as foreign investors may see an opportunity to take advantage of the lower currency rate to achieve higher returns when converting funds into the country, according to Abul-Fotouh.

However, Abul-Fotouh said that this depends on the overall economic situation and the political stability in the country.

On the impact of the local currency devaluation on the stock market’s performance, Abul-Fotouh explained that it will make the EGX more attractive to foreign investors who wish to invest in the Egyptian market at a lower cost.

It is also expected to improve the competitiveness of Egyptian products in international markets, increasing the demand for Egyptian goods and prompting Egyptian companies listed on the stock exchange to increase production and expand their markets, thus improving their financial performance and attracting investment, according to the expert.

However, it will lead to increased import costs for Egyptian companies that heavily rely on imported raw materials, affecting their profits and consequently the value of their stocks in the stock market, Abul-Fotouh said.

For inflation, Abul-Fotouh said that if the devaluation of the local currency is not managed well, it could lead to increased inflation in Egypt, impacting the purchasing power of consumers and affecting investment in the stock market.

* A version of this article appears in print in the 14 March, 2024 edition of Al-Ahram Weekly

Short link: