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Investing.com – A few minutes after Egyptian banks announced the issuance of savings certificates of up to 25%, the Egyptian pound fell strongly against foreign currencies, closing at 26.49 pounds per dollar for the first time ever by the end of the day’s trading, which brings to mind again the potential flotation that most expected. Experts and international banks.
The announcement of raising the return on savings certificates often coincides with a possible adjustment of the currency rate, especially in Egypt, in order to control prices and withdraw liquidity from the market, which happened in 3 previous currency floats.
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interest rate hike and float
October 2022
In October of last year, the Central Bank of Egypt held an extraordinary meeting to decide to float the Egyptian pound for the second time in a year, after increasing the main interest rates by 200 basis points.
March 2022
The same thing happened in the March 2022 flotation, when the Central Bank of Egypt suddenly raised interest rates by 100 basis points on March 21, 2022, and hours later the currency flotation occurred. The overnight lending rate reached 10.25% and the overnight deposit rate reached 9.25%. At that time, the price of the dollar jumped to 18.50 pounds in trading on Tuesday, March 22, 2022, after it was hovering near the 15.50 levels.
2016..the first
Also, the interest rate hike was associated with a flotation since 2016, when the overnight deposit and lending interest was raised by 300 basis points at once, to 14.75% and 15.75%, respectively, in conjunction with the liberalization of exchange rates, as the pound jumped at that time above the levels of 13 pounds, compared to 8.88 pounds before the flotation. .
Sharp losses in the black market
Before the flotation of 2016, the pound was trading on the black market at higher levels than the official rates, but after the flotation and the arrival of the official price close to the levels of the black market, speculation disappeared for a while, but it returned again, but with a much smaller difference than it was before the flotation. Where the currency liberalization coincides with huge losses for speculators on the rise in the price of the currency on the black market. When the official rate in banks rises against foreign currencies, individuals turn to banks instead of dealing in the black market, which is “illegal” in Egypt.
As a result of speculation on the dollar in Egypt in the recent period, it jumped in parallel market transactions to exceed about 36.5 pounds, and traders were pricing it near the level of 40 pounds, which contributed to the exacerbation of speculation, which enticed new segments to speculate on the dollar in an effort to benefit from the successive rises. The government took a lot of measures to address this crisis, which started with providing dollars in banks relatively to importers and releasing goods piled up in ports.
These steps were the key to eliminating black market speculation, and speculation on the dollar soon turned into severe losses. Those who bought dollars at price levels above 30 pounds, hoping that the pound would cross 40 levels, incurred huge losses.
2022.. the beginning of the pound’s decline
The beginning of 2022 marked the end of the pound’s cohesion at the level of 15.75 pounds to the dollar, and local and international financial institutions and banks increased the talk about the real value of the pound, and that it is overvalued, and among these institutions is the International Investment Bank “Renaissance Capital”.
With the start of the Russian-Ukrainian war last year, the pressure on the Egyptian pound intensified. Due to the flight of hot money from emerging markets, the investment bank “JP Morgan (NYSE:)” expected at that time a significant devaluation of the Egyptian pound, and requested assistance from the International Monetary Fund; Which happened later.
Analysts at JP Morgan (EGX:AUTO) said a significant devaluation of the Egyptian pound is likely to be needed, and that the country may need more help from the International Monetary Fund if pressure intensifies.
What does the fund want?
When the pound fell to 24.8 levels, the International Monetary Fund still saw this price as higher than its value. The head of the Fund’s mission to Egypt, Vladkova Hollar, said in an interview with Archyde.com: “The Fund is awaiting Egypt’s transition to a permanently flexible exchange rate after canceling the letters of credit.” Return to collection documents.
The International Monetary Fund expects to see daily movements in the exchange rate in Egypt by the end of this month, after canceling imports through letters of credit, according to Archyde.com.
Accordingly, the Central Bank of Egypt decided to cancel the periodic book issued on February 13, 2022, regarding stopping dealing with collection documents and allowing them to be accepted to carry out all import operations.
This step – according to the expectations of the International Monetary Fund – indicates seeing daily movements in the exchange rate in Egypt at the beginning of the new year, after canceling imports through documentary credits, and switching to a flexible exchange rate.
Prelude to a “permanent” flexible exchange rate?
According to statements by IMF officials, in order to reach complete and sustainable solutions that help stabilize the exchange rate of the pound against foreign currencies, the Egyptian government must adhere to several points, most notably:
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Undertake large-scale structural reforms to reduce the influence of the state and enhance governance and transparency.
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Gradually reduce inflation rates and abolish subsidies for lending programmes.
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Fiscal control and debt management to ensure a decline in the public debt-to-GDP ratio.
In order for these points to be achieved, The Economist expects the pound to continue to decline against the dollar over the next four years. that is, until the year 2026; This makes it difficult to expect a fixed or final price for the Egyptian pound, which indicates a complete liberalization of the exchange rate of the pound against foreign currencies, which was stated by the head of the Central Bank of Egypt during the flotation last October that “determining the exchange rate of the pound will be left to the forces of supply and demand.” .
What is the effect of flotation on the market?
Floating the Egyptian pound would reduce pressure on the central bank with regard to the volume of foreign currency reserves in it, in addition to that the depreciation of the national currency as a result of the flotation will lead to an increase in exports, and Egyptian products will become much cheaper in foreign markets (because the Egyptian pound has depreciated a lot against the dollar and others). ) and then become more competitive.
On the other hand, imports will become much more expensive, and thus it will be difficult for Egyptians to buy a lot of imported goods, due to their high prices.