Egyptian pound plummets after interest rate hike and exchange rate change

The Egyptian pound fell to a new low against the US dollar today after two significant fiscal changes.

What happened: The Central Bank of Egypt raised several key interest rates today by 2%, citing rising prices internationally.

The bank also announced the start of a “sustainably flexible exchange rate regime”. This will measure the Egyptian pound against other foreign currencies.

In addition, the central bank announced that it would start “gradually” ending the use of letters of credit for import financing. They will stop the practice altogether by December this year, according to a statement.

The Egyptian the pound fell more than 13% against the US dollar today, falling to around 23 pounds to the dollar as of 8:40 a.m. ET, according to market data. This is a historic low for the Egyptian pound. In 2016, the currency fell to around 19 to the dollar.

What this means: Central banks generally raise interest rates with the aim of reducing inflation. Higher rates tend to reduce borrowing and therefore cash in circulation. Like other countries, Egypt has experienced significant inflation this year, and this is not the first rate hike in recent months.

The Egyptian government announced earlier this week that it would switch to a “flexible exchange rate regime”. Acting central bank chief Hassan Abdalla said on Sunday they would start measure egyptian pound against foreign currencies and gold, as opposed to the US dollar.

This is in response to the Egyptian pound poor performance against the dollar those last weeks. The pound is doing better against other currencies, such as the euro.

Regarding the letter of credit, Egypt began requiring them for imports in February. Letters of credit are documents issued by banks that guarantee that a seller will receive payment from the buyer within a certain period of time. The move allowed the central bank to control demand for foreign currency, but also led to delays and increased administrative costs, according to a European Union document.

Prime Minister Mostafa Madbouly said on Tuesday that Egypt would abandon the letter of credit system after an apparent outflow of $25 billion from Egypt in a month.

Why is this important: These measures are the latest efforts of the Egyptian government to deal with the economic crisis in the country. Imports from Egypt — especially cereals — have been strained since the war in Ukraine. This partly explains the high inflation and the poor performance of the pound. The last central bank the governor resigned in August. Egypt is also seek more investment of its wealthy Gulf allies to help stimulate the economy.

Know more: The International Monetary Fund (IMF) praised Egypt for its new monetary movement.

“The Central Bank of Egypt’s move to a flexible exchange rate regime is an important and welcome step to correct external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment,” the IMF said in a statement. a statement.

The Washington DC-based institution has also confirmed that it has reached an agreement with Egypt on a 46-month “extended financing facility” for $3 billion. It is a type of loan.

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