Egypt remains engulfed in a severe economic crisis that has left its population of over 105 million in a state of uncertainty. However, one thing seems almost certain: another currency devaluation may be on the horizon.
This anticipated move would mark the fourth major devaluation of the Egyptian pound since early 2022 and might be the largest yet. If implemented correctly, it could potentially end the country’s worst hard currency crisis in decades, attracting foreign capital to its $400 billion economy and saving it from the brink of collapse.
Given the country’s urgent financial needs, estimated by Goldman Sachs to be around $25bn over the next four years, Egypt faces a critical moment. However, the timing of the devaluation depends on both external and domestic issues, with authorities concerned about the inflationary impact on an already suffering population, according to a comprehensive report by Bloomberg.
According to many sources, the International Monetary Fund (IMF) has been urging Egypt for months to move towards devaluation of the currency, a key factor in discussions about a new, extended agreement with the bank and partners that could secure about $10bn in financing for Egypt.
The exchange rate situation, characterised by its multiplicity, is seen as disastrous by Kristalina Georgieva, the managing director of IMF, who advocates for the market to determine these rates.
In an interview with Al Arabiya Business on the sidelines of the World Governments Summit held in Dubai, Georgieva emphasised the need for Egypt to move towards allowing the market to set the exchange rate.
Georgieva revealed that the fundamental aspects of the agreement with Egypt regarding the proposed loan were agreed upon, mentioning that their delegation’s visit to Cairo was “relatively close” to success. She highlighted that Egypt’s financing needs have grown, and the IMF is working with other parties to fulfil these needs.
Egypt typically devalues its currency in conjunction with tightening monetary policy, a move aimed at curbing domestic demand and attracting investment in local assets by making the returns more profitable.
The central bank raised the benchmark interest rate on the same day it devalued the currency twice in 2022 and made a significant increase less than two weeks before the last devaluation. Authorities raised the deposit interest rate for the first time since August to 21.25pc in February – an all-time high – although that does not rule out another move soon.
Egypt has auctioned off more than 20 state-owned assets, from banks to power plants and petrol stations, seeking to secure foreign currency. Sales have picked up after a slow start, with Egypt announcing over $2bn in the second half of 2023.
The government may be preparing the population for rising inflation. Last Wednesday, it announced a 50pc increase in the minimum wage for state employees starting in March. It’s part of a broader social protection package the authorities say is worth about $5.8bn, although they have not specified a time frame.
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