Dubai, United Arab Emirates (CNN)–The Egyptian government devalued the Egyptian pound, on Monday, and moved its exchange rate once morest the US dollar, coinciding with an increase in the interest rate to absorb the exit of foreign investment from the country and control the high inflation wave.
The average exchange rate of the pound once morest the dollar amounted to 18.15 pounds for purchase, and 18.29 pounds for sale, instead of according to the data of the Central Bank of Egypt. Instead of 15.64 pounds for purchase and 15.74 pounds for sale.
Radwa El-Swaify, head of the research department at Al-Ahly Pharos Securities Brokerage Company, said that the Central Bank of Egypt has taken several interrelated decisions, namely moving the exchange rate of the pound, raising interest rates by 1%, and offering public banks high-return savings certificates with the aim of controlling the inflation rate, and at the same time not Negatively affecting the target growth rate in Egypt or the state budget deficit, in addition to compensating the savings owners for the expected inflation during this year.
Al-Swaify explained, in exclusive statements to CNN in Arabic, that the Central Bank’s decision to move the pound exchange rate came in line with the expectations of many local and international institutions and research centers for the fair value of the pound.
The reasons for moving the pound price were likely to global economic pressures, starting with the repercussions of the new Corona virus pandemic two years ago, followed by the tightening of monetary policy in the developed countries, led by the United States, and finally the Russian-Ukrainian war, which prompted the Central Bank of Egypt to move the price of the pound, to prevent any speculation or pressure. Negatively affect the foreign exchange reserves.
And 3 days before the official meeting, the Monetary Policy Committee of the Central Bank of Egypt held an extraordinary meeting, and raised the overnight deposit and lending rates, and the price of the main operation of the Central Bank by 100 basis points to reach 9.25%, 10.25% and 9.75%, respectively. The credit and discount rate was also raised by 100 basis points to reach 9.75%.
Dr. Fakhry El-Feky, Head of the Parliament’s Plan and Budget Committee, indicated that the Central Bank of Egypt’s decision to raise interest rates in an exceptional session came following the US Federal Reserve increased interest rates by 0.25% and the subsequent increase in interest rates at federal banks in Europe and the Gulf countries, in addition to The alarmingly continuous rise in the global inflation rate, which coincided with the recovery of the global economy following the Covid-19 pandemic, and the Russian-Ukrainian war, which affected the export of grain and gas globally.
In exclusive statements to CNN in Arabic, Al-Fiqi praised the decisions of the Central Bank, and identified four reasons behind this – from his point of view – which are: raising interest rates by 1% would curb inflation, and send a positive signal to foreign credit rating institutions. To the Central Bank of Egypt’s adaptation to global changes, and to maintaining the attractiveness of foreign investment in debt instruments, which witnessed an exit following the Russian war on Ukraine, and with an increase in interest would lead to a halt to the net exit of foreign investment.
In addition, the Central Bank is paving the way for resorting to the International Monetary Fund to obtain new financing, according to Al-Fiqi, who expected the Central Bank to take this step during the coming period.
El-Feky pointed out to negative repercussions that will be linked to raising interest rates in Egypt, explaining that this will cause an increase in the budget deficit as a result of the government borrowing from local banks following the interest rate rose from 13.5% to 15%, which puts pressure on the current and future budget.
El-Feky also expected a rise in the cost of borrowing on the private sector, which would reduce the demand for project expansions, and increase the slowdown in economic activity, which would negatively affect the growth of the Egyptian economy.
Meanwhile, Al-Swaify considered that the “cautious” increase in interest came so as not to negatively affect the budget deficit or the growth rate targets of the private sector and companies.
The Egyptian economy achieved a growth of 9% during the first half of the fiscal year 2021/2022, which is the highest semi-annual growth rate since the beginning of the millennium, supported by the significant growth in the first and second quarters.
According to an official statement by the Central Agency for Public Mobilization and Statistics, the consumer price index for the whole of the republic reached 121.4 points for the month of February 2022, recording an increase of 2% from last January.
The annual inflation rate in Egypt recorded 10% for the month of February 2022, compared to 4.9% for the same month the previous year.
Al-Swaify said that the inflation rate in Egypt was on its way to reach the level of 11% following the end of the stock of basic commodities from Egypt, and the start of importing at new international prices, which was reflected in the gradual increase in prices in Egypt, starting from October 2021 until now. The interest rate hike was necessary to control the spiraling inflation trajectory, as well as maintain real interest in Egypt, she said.
The Central Bank of Egypt aims to set the target inflation rate on average during the fourth quarter of 2022 at 7% (±2%) compared to 9% (±3%) on average during the fourth quarter of 2020.
El-Swaify indicated that public sector banks are offering high-return savings certificates of 18% for a period of 18% for a year to encourage savings in the Egyptian pound, and to compensate savers for the inflation that will take place during the year.
In the same context, economist Hani Tawfik, former head of the Egyptian and Arab Investment Associations, said that the Central Bank of Egypt’s decision to raise interest rates by 1% came mandatory following central banks in most countries increased interest rates, and therefore it was necessary to increase interest rates in Egypt to maintain On the attractiveness of foreign investment in debt instruments, pointing out that Egypt offers the highest real interest rate in the world.
Tawfiq indicated, in exclusive statements to CNN in Arabic, that raising interest rates came to counter the increase in the local inflation rate, but he warned of the negative repercussions of the decision on the state’s general budget deficit, given that the Egyptian government is the largest debtor to banks.
He also warned once morest offering high-yield savings certificates, which will lead to savers rushing to public banks to buy these certificates, which will affect liquidity in the banking sector.
Tawfiq explained that moving the exchange rate of the pound so as not to lead to the existence of two prices for the dollar, recalling what happened before the decision to liberalize the exchange rate of the pound in 2016, when the price of the dollar in banks was sold at 8 pounds, while it was sold in the markets at 18 pounds.
