Long-waited devaluation arrives, value of Egyptian pound falls to LE45 in hour

After months of speculation, the Egyptian pound was allowed to float on Wednesday morning, with the national currency’s value falling from LE31 to LE45 against the US dollar in the early hours of the day in some banks.

The drop comes in parallel with the unprecedented decision by the Central Bank of Egypt’s monetary policy committee on Wednesday to raise the interest rate by 6 percent, which comes “within the framework of a comprehensive economic reforms package” that also includes liberalization of the exchange rate, according to a statement published by the bank.

Raising the interest rate in this manner is the central bank’s way of maintaining citizen and investor confidence in the Egyptian pound, a financial analyst at an investment bank told Mada Masr on the condition of anonymity. 

According to the central bank’s statement, the interest rate hike comes as part of an economic reform package that includes “allowing the exchange rate to be determined by market forces.”

“The unification of the exchange rate is crucial,” the bank wrote in its Wednesday statement, “as it facilitates the elimination of foreign exchange backlogs following the closure of the spread between the official and the parallel exchange rate markets.” 

“If the pound was floated without raising the interest rate, the result would have been the exodus of billions to other assets in order to retain value, such as real estate, cars or even gold and dollars,” the source added, noting that government banks will begin to offer certificates with high interest rates to convince citizens to invest in them, instead of other options, and to tighten monetary supply. 

In line with this assessment, as the pound’s value began to gradually decline in the early hours of Wednesday morning, several banks began to offer certificate deposits at the record-high interest rate of 30 percent. 

The source told Mada Masr that CDs with an even higher interest rate would be issued in the coming period. 

Such a large increase in the interest rate suggests that the drop in the pound’s value “will be significant,” the source noted, adding that investors and banks expect a drop of at least 40 percent, which would see the price of the US dollar set at LE40-45. 

The release of essential goods that have been waylaid in ports and for months due to the foreign currency crunch should allow for more imports to begin flowing in, the source added, noting the margin provided by the increased dollar liquidity that the central bank obtained last week as part of the historic, yet still opaque, Ras al-Hikma deal with the United Arab Emirates, and the imminent finalization of a new agreement with the International Monetary Fund that will increase Egypt’s 2022 US$3 billion loan.