Egypt devalues currency by 35% after big rate hike

March 06, 2024 (MLN): Egypt devalued its currency, allowing it to weaken around 35%, following a massive interest-rate hike by a country embroiled in its worst economic crisis in decades, Bloomberg reported.

The pound plunged to 48.18 per dollar as of 3:30pm PST on Wednesday, having traded at about 30.9 for the past year.

It moved minutes after the central bank raised rates at an unscheduled meeting and said it will allow the market to determine the exchange rate.

The move raised the key rate by 600 basis points to 27.25%, according to a statement by the central bank, which also said that unifying the nation’s exchange rates is “crucial.”

The decision likely paves the way for an agreement with the International Monetary Fund on increasing Egypt’s current $3 billion loan to more than $10bn, including funds from other partners.

A new devaluation became possible after Cairo struck a $35bn deal late last month with the United Arab Emirates to develop parts of Egypt’s Mediterranean coast and elsewhere.

Authorities described it as the biggest investment commitment ever secured by Egypt and the scale of it took investors by surprise.

Egypt’s dollar bonds rallied significantly after Tuesday’s decisions. Government debt due in 2047 led the advance, gaining 4 cents on the dollar to around 82 cents.

“We’ll have to wait to see where it settles,” said Farouk Soussa, an economist at Goldman Sachs Group Inc., referring to the currency. “We expect 45-50. The big surprise of the day was the mega hike, which over delivered and has boosted confidence in the market.”

The devaluation brought the pound to a level around its value on the black market.

The IMF has encouraged Egypt to tighten monetary policy to counter inflation of almost 30% and adopt a more flexible official exchange rate.

The central bank’s Monetary Policy Committee said it had “decided to accelerate the monetary tightening process in order to fast-track the disinflation path and ensure a decline in underlying inflation.”

The Muslim holy month of Ramadan, set to begin on Sunday, posed an informal deadline for authorities to implement a devaluation. It’s a period of big family gatherings and expansive evening meals, and authorities were unlikely to wait until then to hand Egyptians a sudden price shock.

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