In a surprising move, Egypt’s central bank declared on Wednesday its decision to let the market dictate the exchange rate, resulting in the Egyptian pound losing over a third of its value within minutes.
Shortly after 12:00 pm (1000 GMT), the Egyptian pound reached a historic high of 49.15 pounds against the US dollar, breaking from over a year of a stabilized official exchange rate around 30.9.
During an unexpected monetary policy meeting, the central bank affirmed its commitment to “allowing the exchange rate to be determined by market forces,” emphasizing the “crucial” unification of the exchange rate.
Facing severe foreign currency shortages, the parallel market rate had surged to 70 pounds to the dollar earlier this year, leading to a spike in consumer prices in the import-dependent nation.
Since the onset of the economic crisis in early 2022, Egypt has grappled with rampant inflation, hitting a record high of nearly 40 percent last August.
In an effort to curb inflation, the central bank also raised its key deposit rate by six points on Wednesday, setting a record high of 27.25 percent.
The central bank framed the move as an attempt to “accelerate the monetary tightening process to fast-track the disinflation path and ensure a decline in underlying inflation.”
Egypt has been in discussions with the International Monetary Fund (IMF) regarding increasing the value of an already agreed-upon $3 billion loan facility.
A fully flexible exchange rate and a more stringent monetary policy were among the conditions stipulated by the IMF, with loan tranches repeatedly delayed until these reforms were implemented.
Before Wednesday’s announcements, Egypt had devalued its currency three times in recent years but had refrained from fully floating the pound, citing concerns for the impact on the two-thirds of Egyptians living below or on the poverty line.
Analysts suggest that Cairo’s decision to embrace exchange rate reform was bolstered by the late-month announcement of $35 billion in foreign direct investment by the United Arab Emirates.
President Abdel Fattah al-Sisi disclosed that the first tranche of $15 billion had already been deposited, with the balance expected by May.
