The pound is undervalued due to devastating rumors… and expectations of an interest rate hike and a third flotation By

© Reuters. – The Egyptian markets are awaiting the Central Bank’s decision on December 22nd, which comes after the International Fund approved Egypt’s obtaining a $3 billion loan with the receipt of the first installment of the loan.

The decision comes amid a state of concern about an exceptional meeting similar to previous meetings that may witness a new depreciation of the Egyptian pound, especially after the fund approved the loan with the condition of obtaining a permanent flexible exchange rate.

It is noteworthy that the official price of the pound is currently near levels of 24.7 pounds to the dollar, while Reuters and CNBC reported, according to sources in the exchange market, that the price of the dollar in the parallel market approached 40 pounds to the dollar.

200 points

The Research Department of HC Securities and Investment Group issued its expectations regarding the possible decision of the Monetary Policy Committee in light of the current situation in Egypt.

It expected the Central Bank of Egypt to raise the interest rate by 200 basis points in order to confront inflation at its next meeting scheduled for Thursday, December 22nd.

This comes after the Federal Reserve concluded its two-day meeting, in which it decided to increase the interest rate by 50 basis points, bringing the total increase to 425 basis points since the beginning of 2022.

counter inflation

The HC Securities and Investment report revealed: “It is expected that the Monetary Policy Committee will raise the interest rate by 200 basis points in order to confront inflation and attract inflows that benefit from the price differences.

The report pointed out that inflation accelerated in November, rising by 2.3% on a monthly basis and 18.7% on an annual basis, exceeding the bank’s estimate of 16.5%.

This acceleration, coupled with the current shortage of foreign capital inflows, has led to our expectation of an annual inflation rate of 19.1% in December, the bank said.

The real value

Former Central Bank Governor Hisham Ezz Al-Arab, a member of the Board of Directors of the Commercial International Bank (EGX), said that he is confident that the Egyptian economy will overcome the problems of the current exchange rate.

Ezz Al-Arab added that the government is moving in the right direction through a series of reform economic measures announced by the IMF agreement, and that the leadership of the Central Bank is able to control the rhythm of the market.

Ezz Al-Arab said: “The currency is one of the means of monetary policy, and it is a means, not a goal.” He added that the local currency is two pounds less than its value against the dollar.

Black market

Hisham Ezz Al-Arab said that the black market imposed unjustified numbers as the situation was exploited, and rumors were raised to profit from it, such as the two rumors of the extraordinary Central Bank meeting last Thursday evening, and before that that the IMF would not agree to the program with Egypt.

Ezz Al-Arab revealed that some importers obtained the dollar exchange rate from banks at the official rate and held consumers accountable for the final product at the black market exchange rates.

Ezz Al-Arab said that the main goal of the government and the Central Bank is to stabilize prices by targeting inflation, stressing that the current problem is the existence of a funding gap as a result of the exit of hot money just before the war and global inflation.

imminent breakthrough

Ezz Al-Arab added that there are lessons learned from the crisis, recognized by the state, and in line with the requirements of the fund announced by the government before even the agreement or moving forward with it.

The former advisor to the Central Governor said that he is optimistic about the coming period, expecting the beginning of a breakthrough with the exit of goods, production requirements, and merchandise that are stacked in the ports.

Hisham Ezz Al-Arab indicated that Egypt is moving in the right direction, and that there is complete confidence in the management of the Central Bank in fixing matters.

extraordinary meeting

The French bank expected the Central Bank of Egypt to move more decisively towards floating the pound, and to raise interest rates by at least 2%.

The bank also expected, in its research note, that the IMF would approve the extended facilitation agreement before the end of this year, but it said that, nevertheless, it is unlikely that the fund will disburse the first tranche, estimated at $750 million, to Egypt before the central bank takes a decisive step towards flexible exchange rate. .

BNP Paribas (EPA:) estimated that the price of the dollar against the pound will rise to 33 pounds by the end of this year and about 37 pounds by the end of the first quarter of next year. By doing so, the bank expected the average inflation rate to reach 22% next year.

The fund’s decision.. and the immediate payment

And last Friday, the International Monetary Fund announced the approval of its Executive Board for a 46-month cooperation program within the framework of the Extended Fund Facility (EFF) for Egypt at about $3 billion (equivalent to 115.4% of Egypt’s share in the fund).

The decision of the Executive Board of the Fund allows the disbursement of an immediate payment equivalent to 347 million dollars to help meet the needs of the balance of payments and support the budget, according to a statement from the Fund.

Another 14 billion

The IMF also said that the Extended Fund Facility it agreed to for Egypt is expected to encourage the availability of additional financing for Egypt over the course of the program, amounting to approximately $14 billion, from its international and regional partners.

The fund added that this additional financing will include new financing resources from the GCC countries and other partners through the ongoing sale of state-owned assets and traditional financing channels from bilateral and multilateral creditors.

exchange rate forecast

Hani Geneina, an economist and lecturer at the American University, expected larger movements in the exchange rate during this week and an increase in the daily change limit.

Mona Badira, an economist, said that the exchange rate will only stabilize when the state can secure sufficient financing needs in dollar liquidity to cover pent-up demand and bridge the gap between supply and demand in the exchange market, which is causing the emergence of the parallel market during the current period.

Bdeir added that a significant devaluation of the pound is unlikely during the coming period, unless the Central Bank has sufficient liquidity to meet the demand in order to finance the import of goods, especially the required basic commodities.

Fund requirements

Specifically, the fund stated that the package of policies included in the program includes 4 measures:

  • 1- A permanent shift to a flexible exchange rate system to enhance resilience in the face of external shocks and to rebuild external protective reserves

  • 2- Implementing a monetary policy aimed at gradually reducing inflation rates in line with the objectives of the Central Bank, in addition to strengthening the mechanism for transmitting the effects of monetary policy, including by canceling support for lending programs.

  • 3- Fiscal control and debt management to ensure a decline in the public debt-to-GDP ratio and contain the total financing needs, while increasing social spending and strengthening the social safety net to protect vulnerable groups, and managing national investment projects in a way that achieves the sustainability of the external position and economic stability.

  • 4- Large-scale structural reforms to reduce the state’s footprint, ensure fair competition among all economic entities, facilitate private sector-led growth, and enhance governance and transparency in the public sector.

Overview of previous meetings

It is worth noting that, in a special meeting on October 27, the Monetary Policy Committee of the Central Bank of Egypt decided to raise the interest rate by 200 basis points and move to a permanent flexible exchange rate system.

In the last meeting, the Central Bank of Egypt decided to leave the forces of supply and demand to determine the value of the Egyptian pound against a basket of other foreign currencies, which resulted in a 14% decline in the currency price that day.

Accordingly, this led to a total rise in interest rates in Egypt in 2022 of 500 basis points, while the local currency depreciated by about 60% from levels of 15.7 pounds to the dollar on March 20 to current levels.

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