The currency had its worst decline since the Central Bank of Egypt devalued the pound in late October in an attempt to seal the IMF agreement, falling 6% to 26.4 to the US dollar. Wednesday’s decline coincides with the blocking of billions of dollars’ worth of shipments at Egyptian ports due to local banks’ inability to get enough foreign currency to pay for them.
Following Russia’s invasion of Ukraine in February 2022, global debt investors fled for safety, withdrawing $20 billion. Egypt, the greatest importer of wheat in the world, was severely harmed by the war’s increase in raw material costs. The IMF agreement includes a clause requiring Egypt to execute “a permanent move to a flexible exchange rate system” as opposed to utilising its foreign exchange reserves to maintain a target exchange rate. Prior to the move in October, the CBE depreciated the pound in March, during which time it lost 40% of its value relative to the dollar.
The need for importers to obtain letters of credit was removed by the central bank in late last year. This restriction was first put in place in March to slow down the import process and save precious foreign currency resources. Since the nation depends heavily on imports for many of its basic requirements, successive Egyptian administrations have been hesitant to switch to a flexible exchange rate in order to prevent sharp price increases. However, the recent shortage of foreign currency and the formation of a dollar black market had already fueled inflation to 18.7% in November, its highest level in five years.
In an effort to reduce inflation, the central bank raised interest rates by three percentage points in December. State-owned banks started selling one-year deposit certificates on Wednesday with a 25% interest rate in an effort to persuade depositors to keep their Egyptian pounds rather than exchange them for dollars.
According to Mostafa Madbouly, the prime minister, the backlog of goods held up at ports amounted to nearly $9.5 billion, and analysts will be waiting to see whether money will be available to clear it. These products range from maize and soy, which are used as animal feed, to automobiles, industrial inputs, and home furnishings.
