The Central Bank of Egypt (CBE) announced a two-pronged approach on Wednesday, in an effort to address pressing economic challenges. The bank decided to float the Egyptian pound, ending its peg to the US dollar, and raised interest rates by 6%.
Governor Hassan Abdalla explained that the decision to float the currency aimed to unify the exchange rate and eliminate the black market that had emerged due to foreign currency shortages. He further stated that the interest rate hike was intended to curb inflation and support citizens.
He added during a Wednesday press conference that the Central Bank of Egypt has started providing dollars in large quantities through banks to cover import operations.
Egypt’s economic landscape has been strained by several factors, including high inflation, a lack of foreign currency, and a widening budget deficit. Inflationary pressures have been mounting in recent months, reaching 14.1% in February. The foreign currency shortage has also been a significant concern, fostering a black market for dollars.
The CBE’s actions represent a bold move to address these issues. However, short-term consequences are anticipated, such as increased prices for imported goods and a potential slowdown in economic growth.
Abdalla said that Egypt has regained access to external financial markets, providing the country with an additional source of funding if needed.
Monetary tightening is a temporary measure to combat inflation said the Deputy Central Bank Governor Rami Aboul Naga.
The bank acknowledged the weight of foreign exchange shortages on the domestic economy, highlighting the existence of a parallel exchange rate market and its constraints on growth.
Additionally, the impact of global inflationary pressures was recognized, with the world economy facing successive shocks that have elevated risk aversion and inflation expectations. These factors, combined with exchange rate movements and rising international commodity prices, have contributed to persistent inflationary pressures driving inflation to record highs.
Despite recent declines in annual inflation figures, they are still expected to remain significantly above the Central Bank’s target of 7% in the fourth quarter of 2024.
Reaffirming its commitment to price stability and sustainable economic development, the CBE emphasized its transition to a flexible inflation targeting regime. This approach involves allowing the exchange rate to be determined by market forces while maintaining inflation as the nominal anchor. The unification of the exchange rate is seen as crucial to eliminating foreign exchange backlogs and closing the gap between the official and parallel markets.
In line with the tightening monetary policy stance, the Monetary Policy Committee (MPC) significantly raised key interest rates by 600 basis points. This move aims to accelerate disinflation and ensure a decline in underlying inflation. The MPC emphasized the importance of anchoring inflation expectations and bringing the real interest rate into positive territory.
While acknowledging the potential for a short-term contraction in private sector credit growth due to the tighter stance, the CBE prioritized curbing inflation as it fosters a more stable environment for long-term private sector growth.
These measures are part of a comprehensive economic reform package implemented in collaboration with the government and supported by international partners. Sufficient foreign exchange liquidity has been secured to facilitate the successful implementation of these reforms. Furthermore, prudent monetary and fiscal policies will be employed to mitigate the impact of external factors on the domestic economy and ensure sustainable economic growth, debt sustainability, and the accumulation of foreign exchange reserves.
The elimination of the parallel foreign exchange market is expected to dampen inflation expectations and bring inflation on a downward trajectory in the medium term. However, upside risks remain, including regional geopolitical tensions, volatility in international commodity markets, and global financial conditions. The CBE will reassess its inflation targets and communicate any changes transparently in light of these evolving circumstances.
The MPC remains committed to monitoring inflation closely and will adjust its policy stance as needed to achieve the desired disinflationary path. The committee believes that the current tightening brings the monetary policy to a sufficiently restrictive level to anchor inflation expectations and will be maintained until the desired disinflationary course is achieved.
Moving forward, the monetary policy stance will be calibrated to minimize deviations from both the inflation target and the level of economic activity consistent with full potential. The MPC will continue to monitor economic developments closely and utilize all available tools to achieve its medium-term price stability mandate. The committee reiterates that future policy rates will remain data-driven and contingent on the evolving inflation outlook.
On a different note Tarek El-Kholy, Deputy Governor of the Central Bank of Egypt said that the banking sector is strong and stable, with an average capital adequacy ratio of 18.6% that exceeds global average.
