While the Egyptian market is awaiting the Central Bank of Egypt’s decision during the Monetary Policy Committee’s meeting, at the end of this week, regarding interest rates, there are 6 determinants that make the situation more difficult for the Central Bank.
These determinants are the rate of inflation, the continuation of The depreciation of the Egyptian pound against the dollarThe ongoing negotiations with the International Monetary Fund regarding obtaining new financing, the tendency of private sector activity to contract, the flight of hot money, and finally the economic growth rate targeted by the Egyptian government.
In terms of inflation, annual inflation accelerated to 13.6 percent in July from 13.2 percent in the previous month, and monthly inflation rose 1.3 percent on a monthly basis, compared to a decline of 0.1 percent on a monthly basis in June, which requires speed of action with regard to absorbing available liquidity. From the domestic market to calm successive waves of price hikes.
How will the pound move?
As for the Egyptian pound, the expectations of investment banks and international institutions indicate that it is being traded at a higher value. Since the sudden intervention by the Central Bank of Egypt last March to devalue the pound, the dollar exchange rate has jumped from the level of 15.66 pounds to 17.42 pounds, while it is currently trading at the level of 19.10 pounds.
Both “Deutsche Bank” and “Goldman Sachs” stated that the Egyptian currency is overvalued by 10%. But Citigroup has a 5% lower rating. Meanwhile, Bloomberg Agency lowered the value of the Egyptian pound by 23%, as a necessity to advance the economy and reduce the financing gap. The Egyptian pound has fallen more than 15% against the dollar since last March.
Regarding the ongoing negotiations with the IMF, the Fund stressed Egypt’s need to take further steps to promote the development of the private sector, improve governance and reduce the role of the state, in case the country wants to obtain a new loan. He noted the need to make decisive progress on deeper financial and structural reforms to enhance the economy’s competitiveness and make it more resilient to shocks.
The IMF assessment revealed that the SBA achieved its primary objective of maintaining macroeconomic stability, and that policy implementation was broadly in line with the program’s objectives. While the International Monetary Fund said that the Egyptian government’s goal of enhancing confidence through a stable currency, it was possible to promote greater fluctuations in the exchange rate during the credit standby agreement, to avoid the accumulation of external imbalances and facilitate adaptation to shocks. The International Monetary Fund is expected to demand more flexibility in the pound as a condition for providing new aid to Egypt.
The decline in the activity of the private sector
With regard to business activity, recent data revealed that the non-oil private sector activity in Egypt continued to contract at a rapid pace last July, as high inflation affected demand and production, according to the Purchasing Managers Index issued by Standard & Poor’s Global.
The non-oil private sector in Egypt recorded its largest decline in two years last June, as it contracted at a faster pace with the decline in demand due to pressures on the supply side, in addition to high inflation and the depreciation of the Egyptian pound against the dollar.
According to the report, business activity decreased at a slightly slower pace during last July amid signs of a decline in inflation, although the reading was among the weakest since the pandemic hit the economy in the second quarter of 2020. The index rose to 46.4 points last month, up from Its lowest level in two years at 45.2 points last June, marking the largest increase in the index in nearly a year, although it is still below the 50 barrier that separates growth from contraction. This is the twentieth consecutive month that the private sector in Egypt has contracted.
With regard to the flight of hot money, the Egyptian Prime Minister had revealed that nearly 20 billion dollars had flown out of Egypt since the beginning of the year and before the economic crisis. Pointing at the same time to Egypt’s success in obtaining nearly $12 billion between Gulf investments and deposits, pointing out that it was agreed that bank deposits would be transferred to direct investments in Egypt.
lower growth forecast
With regard to economic growth rates, the International Monetary Fund maintained its forecast for the growth of the Egyptian economy at 5.9% during the last fiscal year, but lowered its growth forecast for the current fiscal year by 0.2% to 4.8%.
The Research Department of HC Securities had expected the Central Bank of Egypt to raise the interest rate by 200 basis points at its next meeting scheduled for Thursday, August 18.
“The July inflation figure was higher than our estimate of 13.0% on an annual basis, and we expect inflation to average 14.2% over the remainder of the year, well above the central bank target,” said Monet Doss, the company’s senior macroeconomic and financial services analyst. The Egyptian rate of 7% (+/- 2% for the fourth quarter of 2022).
She stated that looking at Egypt’s external accounts, we believe that “the pressure is accumulating on the Egyptian balance of payments, including our estimate of the current account deficit for the fiscal year 2021/2022 at 4.8% of GDP, higher than the deficit of the previous year, which amounted to 4.6%, and the decrease in workers’ transfers in Abroad for the month of April increased by 7% month-on-month to $3.1 billion.
Also, the Egyptian banking sector’s net position of foreign currency liabilities (excluding the Central Bank of Egypt) widened to $11.5 billion in June, and foreign currency deposits, not included in the official reserve, decreased to $0.89 billion in July from $11.2 billion in December.
This is in addition to net international reserves of $33.1 billion covering 4.71 months of imports. Finally, Egypt’s external debt repayment schedule includes the repayment of loans (excluding deposits of the Gulf Cooperation Council countries) amounting to 12.1 billion dollars during the fiscal year 2022/2023.
She explained that raising the interest rate by 200 basis points in addition to devaluing the currency by 9%, to 21.2 Egyptian pounds per dollar, is necessary to support the currency and combat dollarization. As such, it is likely that higher interest rate certificates can be reissued by state-owned banks to boost remittances, especially with higher income levels in the GCC.