Central Bank Takes Action
On November 3, the Central Bank of Egypt (CBE) moved to a more flexible exchange rate system and adopted a significantly tighter monetary stance. The Egyptian pound was devalued to EP13 to the dollar, from EP8.9, and will be allowed to float within a 10% band on either side. The spot rate ended trading at 14.15 to the dollar–settling a loss of 37% on the day and the 12 month non-deliverable forwards weakened to a record low of 17 to the dollar.
The CBE’s key two policy rates, the overnight deposit and overnight lending rates, have been raised by 300 basis points to 14.75% and 15.75%, respectively.
The flexible exchange rate regime and the tighter monetary stance are part of a broader package of reforms agreed in August of this year with IMF staff. On November 11, the IMF Executive Board approved the staff-level agreement for a three-year $12 billion Extended Fund Facility (EFF).
Such an endorsement will also help to secure additional of $14 billion from other multilateral and bilateral sources as well as bond issuance in the international markets to close the financing gap, which we estimate at $26 billion, for the next three years.
“The recent move to a flexible exchange rate and tighter monetary policy along with other reforms will help to restore competitiveness, reduce external imbalances, rebuild reserves, and alleviate investor uncertainty over what their pound assets will be worth.”
The higher interest rates will mitigate additional inflationary pressures that would arise from a depreciated exchange rate, and encourage adequate inflow of foreign capital to avoid disorderly conditions. Also, the IMF program would provide a framework to secure the macroeconomic stability and reforms necessary to move the economy to a higher and sustainable growth path.
The current black market rate of EP 17 per dollar is far from equilibrium value, which we estimated recently to be in the range of 12:5-14.0 per dollar. Given the adequate foreign financing and tight monetary policies, the spread between the official and parallel rate is expected to narrow in the coming months and the two rates are likely to be unified by mid-2017.
Abut Garbis Iradian
Based in Washington, D.C. as chief economist for the Middle East and North Africa Department with the Institute of International Finance (IIF), Garbis Iradian focuses his work and research on Morocco, Egypt, Lebanon and the United Arab Emirates (UAE). He received his BBA and MBA from the American University of Beirut, and his PhD in economics with an emphasis on macroeconomics and econometrics from the University of Freiburg, Germany. He is fluent in Arabic, English, French and German and has published several articles and working papers, including: “What Explains the Rapid Growth in Transition Economies”, and IMF staff paper, November 2009.