Cityscape in Egypt

Egypt Exchange Rate April 2022

Egypt: Central Bank lets Egyptian pound tumble against the greenback

The Egyptian pound plunged against the U.S. dollar in recent weeks, falling to its lowest level since 3 February 2017 and trading at 18.54 on 22 March. On 1 April, the currency traded at EGP 18.28 per USD, which marked a 14.1% depreciation from the same day a month prior. Meanwhile, the pound was down 14.1% year-to-date and in year-on-year terms.

Following approximately two years of stability against the U.S. dollar, the Central Bank of Egypt (CBE) allowed the pound to depreciate markedly at its surprise 21 March meeting—originally scheduled for 24 March. The Central Bank’s move to a flexible exchange rate, and to deliver its first rate hike since 2017—leading to a positive real interest rate—eased concerns about the pound being overvalued. The CBE’s decision bodes well for the new support program the country is seeking with the IMF.

The outbreak of war in Europe created headwinds for the world’s largest wheat importer. Russia’s invasion of Ukraine on 24 February sent agricultural commodity prices booming amid supply concerns. This should see higher prices for food, especially in the short term, and for energy, bolstering inflation in turn. Consequently, authorities have deployed fiscal measures to help mitigate the impact on households, which should see a widening of the fiscal deficit ahead. The package includes annual increases of pensions and public salaries starting in April, raising the tax exemption limit, and allocating EGP 130 billion (USD 7.1 billion) to mitigate the inflationary impact and EGP 2.7 billion (USD 148 million) to widen the scope of social welfare programs. Authorities have also capped—for the first time ever—the price for unsubsidized bread. In light of these measures, Egypt announced it would restructure its budget for the fiscal year 2022–2023, which starts in July 2022.

Additionally, the all-important tourism industry will also be negatively impacted by the war, as Russians and Ukrainians made up for approximately 33% of all tourism arrivals. The conflict also prompted investors to flee emerging markets as panic took hold, while recently central banks around the world began tightening conditions, boding ill for the highly indebted country.

Consequently, Egypt recently turned to the IMF, and is in talks with the Fund with the hope of penning a new program to help alleviate the pressure of the economic fallout from the war in Ukraine. In fact, one of the Central Bank’s recent moves fulfilled one of the requirements of the Fund for embarking on such a program, namely flexibility in the exchange rate to make the pound an absorber of external shocks—allowing the preservation of the country’s competitiveness and the safeguarding of financial buffers. With this shift, authorities hope to protect Egypt’s foreign reserves and close a new program with the IMF, which would boost investors’ confidence, thus halting capital outflows in turn.

Reflecting on threats to the outlook, Farouk Soussa, economist at Goldman Sachs, noted:

“The main risk to this that we see is that the recently announced hike/devaluation is not large enough, and that portfolio investors remain on the sidelines in expectation of more. That said, we see constraints on how far the CBE will be willing to go: Further hikes will come at a cost to domestic growth and the government’s interest burden, and devaluation will have a pass-through effect to already rising inflation.”

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