Markets

Egyptian pound plunges 55% to match black market dollar

March 6, 2024, 2:14 PM

Egyptian pound banknotes — An employee counts Egyptian pounds in a foreign exchange office in Cairo: the official and black market rates are now much closer

Central bank to let market set rate
Interest rates rise 6 percentage points
Stock market hits record high

The Egyptian pound plunged by 55 percent on Wednesday to a record official low of 48 against the US dollar, bringing it almost in line with the parallel market rate.

The Egyptian central bank (CBE) said in a statement that it planned to allow the exchange rate to be determined by market forces.

At 2pm UTC on Wednesday the parallel market rate stood at $1/EGP52.4.

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The fall comes after months of speculation as Egypt attempted to defend the previous pound/dollar rate of around $1/EGP30.9, despite a pervasive foreign currency crisis and a parallel dollar rate that briefly topped $1/EGP70 at the start of last month.

The decision to let the exchange rate of the Egyptian pound fall has increased optimism that a more generous International Monetary Fund (IMF) package, possibly between $8 billion and $10 billion, could be announced imminently.

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The IMF has long made the adoption of a more flexible exchange rate a central demand in its negotiations with Cairo.

Egypt’s central bank also raised interest rates by 600 basis points (bps) to a record 27.25 percent. In a statement, the CBE said that unity of exchange rates was “crucial”.

Capital Economics, the London-based economic analysis company, was among observers to welcome the devaluation, calling it proof that Egyptian policymakers were “committed to turn back toward economic orthodoxy”.

It said in a note that the move “appears to be a positive step for Egypt on the path out of its current crisis” and that it could pave the way for an IMF deal “within hours”.

The long-awaited decision to lower the exchange rate of the Egyptian pound comes after an announcement that ADQ, a UAE sovereign wealth fund, would be transferring $35 billion, including $11 billion of debt relief, to the Egyptian government. This is in return for developing Ras el Hekma on Egypt’s north coast as well as “other prime projects in Egypt”.

Egypt’s international bonds soared after Wednesday’s announcements. The 2047 bond registered the biggest gains, up 3.5 cents at 83.2 cents, according to Reuters. Egypt’s bond spread of US treasury yields narrowed to 529, the lowest level since June 2021.

Egypt’s EGX30, the benchmark index of the Egyptian Stock Exchange, jumped by 4.5 percent to a record high of 31,732.