The Central Bank of Egypt (CBE) has moved its exchange rate regime to a managed float, setting the Egyptian pound to E£13/$ and annoucning its intention to allow the exchange rate to converge to a market price at the upcoming auction. 

The CBE has also stated that “the decision to liberate the exchange rate” aims to alleviate foreign exchange shortages in order to “to better reflect supply and demand”. 

The official rate is 32% weaker than the previous rate of E£8.88/$ and is 17.7% stronger than the parallel market rate. 

The announcement comes after the Prime Minister, Sherif Ismail, commented in Parliament on October 31 that the CBE will “issue new measures regarding the exchange rate”. 

In response, the parallel market rate saw a reversal of its weakening trend from as high as E£18.4/$ on October 31 to E£17.5/$ on November 1 and has reached E£15.3/$ on November 3. 

The strengthening of the parallel market was further aided by the announcement from the Egyptian Federation of Chambers of Commerce on November 2 that traders should refrain from engaging in the parallel market (excluding commodities) in order to contain the soaring black market rate.

In tangent with the decision to liberalise the exchange rate, the CBE has announced that they have raised key lending rates by 300 bps in order to restore investor confidence and resolve foreign exchange shortages. 

This takes the overnight interest rate to 14.75%, the lending rate to 15.75%, policy rate to 15.25% and the discount rate to 15.25%. 

Furthermore, in another notable shift in policy, the CBE also announced that it would abolish the list on priority imports and phase out monetising the fiscal deficit in the coming months.

Nadene Johnson, Analyst at NKC African Economics, said the move towards a managed float is a positive development, given the severity of the foreign exchange and in turn food shortages. 

“Furthermore, the parallel market rate was over 50% weaker than the official market rate by end-October, where it is now only 17.6% weaker, helping ease the rundown of the CBE’s foreign reserves,” she said. 

Johnson said this decision places Egypt in a strong position to receive the final approval of the much-needed $12bn loan from the International Monetary Fund (IMF) as exchange rate liberalisation was one of the prerequisites of the loan approval. 

“The movement will also have immensely positive effects on a number of macroeconomic statistics. In particular, it will help restore investor confidence thus increasing foreign direct investment (FDI). In turn, this will strengthen the level of foreign reserves and help importers in obtaining the necessary imports of key manufacturing goods, which may ultimately foster sustainable real GDP growth,” she said. 

“A weaker exchange rate will also have a positive impact on the trade balance, which has become very wide in recent years, and will also help to attract tourists. On the other hand, short-term inflationary pressures will increase due to exchange rate pass-through of currency depreciation, while potential subsidy reforms will also pose upside inflationary risks, and coupled with the 300 bps interest rate hike may adversely affect consumption in the short term,” she said. 

“However, in terms of social pressures, the IMF noted that its programme does not call for a reduction in food subsidies and actually aims at social protection. The accompanying tightening of monetary policy ensures positive real interest rates and will put downward pressure on inflation going forward,” she added.