As CBE adopts flexible exchange rate, will 2016 scenario be repeated?

Fatma Salah
3 Min Read

The Egyptian financial scene was startled as the Central Bank of Egypt (CBE) surprisingly raised the key interest rates in an unscheduled meeting on Thursday morning by 2% and adopted a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the local currency against other foreign currencies.

Earlier this week, the CBE’s acting governor Hassan Abdallah said that the bank’s priority amid the ongoing phase is to curb the inflation rates and keep prices stable in the local market.

Amr Al-Alfi, head of research at Prime Holding, said that the positively affected companies of Thursday’s decisions are those operating in the export sector, while the companies that rely on imported production inputs, such as propylene, petroleum, etc., will be negatively affected, due to the lack of pricing negotiation power with suppliers, in addition to the lack of cost control.

Al-Alfi explained that increasing the final price of the end product to compensate for the production cost hike will not be as easy as it happened in 2016, due to the expected slowdown in demand. In addition, companies will not raise final prices out of fear to lose their market share.

He hinted that foreign investors will not inject new funds in Egypt until the exchange rate settles and the government offers hedging arrangements for foreign investment. However, the current price of the US dollar against the Egyptian pound is one of the favourable aspects for foreign investors.

Meanwhile, Egypt reached an agreement on staff level with the International Monetary Fund (IMF) for a new $3bn loan deal under a fresh economic reform programme that is expected to be finalised before the end of 2022.

The MPC’s remaining two meetings in 2022 are scheduled on 3 November and 22 December.

Following the decision, the Egyptian pound hit its lowest level against the US dollar since the implementation of the economic reform programme in November 2016, with the exchange rate surpassing EGP 23 to the dollar.

 

TAGGED:
Share This Article