Egypt’s outlook turned optimistic as the pound strengthened on Friday to EGP49.35 for a dollar, following a significant shift in the country’s exchange rate policy. The central bank’s move towards a more flexible exchange rate, coupled with an expanded $8 billion International Monetary Fund (IMF) program, aims to bolster investor confidence and revitalize the economy, which has grappled with foreign currency shortages in recent years.
Exchange rate dynamics
Prior to Wednesday’s de-facto devaluation and steep interest rate hike, the Egyptian pound had been fixed at just under 31 to the dollar for approximately a year. The pound hovered near 49.5 to the dollar on Thursday, following the policy announcement, maintaining similar levels to the previous day. The recent shift to a more flexible exchange rate, long advocated by the IMF, is essential for restoring investor trust in Egypt’s economy.
Positive indicators
Following the IMF deal, signs of improved sentiment emerged as foreign investors resumed purchases of Egypt’s treasury bills after a long absence. This indicated growing confidence in the country’s economic trajectory. The shortage has curbed local business activity. Moreover, it has led to port backlogs and delays in the government’s payments for commodities, including wheat.
Prime Minister Mostafa Madbouly emphasized the government’s commitment to implementing significant deals to ensure liquidity and stabilize prices. In addition, the government is prioritizing foreign currency access for essential commodity importers amidst the currency shift.
Economic reforms
Finance Minister Mohamed Maait highlighted Egypt’s expectation of $20 billion in support from multilateral partners such as the IMF, World Bank, and the European Union. The government also pledged to pursue a program that aims to sell state assets and foster private-sector investment. Maait expects Egypt to execute several deals in various strategic sectors worth around $3.5 billion.
Egypt’s international bond prices experienced fluctuations and declined further on Thursday, reflecting initial market reactions to the policy changes. Despite the short-term adjustments, officials remain optimistic about the long-term benefits of the reforms.
Read: IMF agrees to expand Egypt loan agreement by $5 billion
Structural reforms and interest rates
The IMF, which agreed to add $5 billion to its existing $3 billion loan program with Egypt, stated that it is looking for a sustainable and unified exchange rate determined by the market.
Under the IMF program, Egypt has committed to implementing structural reforms to stabilize prices, manage debt, and foster private sector growth. Central Bank governor Hassan Abdalla indicated that following a 600 basis point hike on Wednesday, interest rates would now follow a downward trajectory.
Egypt’s government remains vigilant against challenges such as the diversion of remittances outside the formal banking system. Prime Minister Madbouly emphasized enforcing strict measures to combat such activities, signaling a commitment to maintaining financial integrity.
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