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The Egyptian pound at historical lows after the announcement of the agreement with the IMF for 3,000 million dollars

The Egyptian pound fell about 14.5 percent to a record low against the US dollar after authorities announced a $3 billion International Monetary Fund (IMF) deal pledging a “debt regime.” flexible and durable exchange rate.

The central bank also raised interest rates by 200 basis points in an off-cycle meeting, saying it was aimed at anchoring inflation expectations and containing demand-side pressures.

Egypt had been in talks with the IMF for a new loan since March after its economic problems deepened due to the war in Ukraine. The fund has long been urging Egypt to allow more flexibility in the exchange rate.

In a statement Thursday confirming a staff-level agreement on a $3 billion 46-month Extended Fund Facility, the IMF said a flexible exchange rate regime should be “a fundamental policy to rebuild and safeguard the Egypt’s long-term external resilience”.

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He said the deal was expected to catalyze a large, multi-year financing package, including about $5 billion in the fiscal year ending June 2023, reflecting “broad international and regional support for Egypt.”

Egypt’s central bank said it intended to step up economic reforms and had “moved to a durable and flexible exchange rate regime, letting the forces of supply and demand determine the value of the EGP against other currencies.” foreigners”.

The pound quickly weakened to around 23 per US dollar from 19.67, Refinitiv data showed. That was similar to the parallel market rate and indicated a floating currency, Naeem Brokerage said in a note.

The bank had already allowed the pound to depreciate 14 percent against the dollar in March, and the currency has been gradually depreciating since May. Former central bank governor Tarek Amer, under whom the pound had been stable for a long time, was abruptly replaced in August.

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Non-deliverable futures, which FX traders use to bet on currency movements over various timeframes, pointed to the pound falling to around 24 to the dollar over the next three months and 26 to the dollar over the next year. .

Egypt’s international government bonds also gave back the gains they had made earlier in the day, pushing most of them up in price by more than 2 cents on the dollar.

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Impact of the Ukrainian war

The war in Ukraine has pushed up Egypt’s bills for wheat and oil, while also dealing a heavy blow to tourism in two of its biggest markets, Ukraine and Russia, a key source of foreign exchange.

In its statement on Thursday, the central bank said the conflict had “dire economic ramifications” and consequently led to Egypt experiencing large capital outflows.

Annual headline inflation accelerated to 15 percent in September, its highest level in nearly four years, according to official data. The price increases, coming after years of austerity reforms under a 2016 IMF deal, have affected many of Egypt’s 104 million people.

On Wednesday, the government raised the public sector monthly minimum wage by 11 percent to 3,000 Egyptian pounds, extended a freeze on residential electricity prices for six months until June 2023, and also extended subsidy card benefits. food.

The central bank said it would continue to announce inflation targets “along the predetermined path of disinflation that began in 2017.” The bank’s current target is 5 to 9 percent.

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The 200 basis point increase in rates brings the overnight loan rate to 14.25 percent and the overnight deposit rate to 13.25 percent.

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The size of the IMF deal appeared to be in line with the lower end of expectations, said Emre Akcakmak, a senior consultant at Dubai-based East Capital.

“What is more important to note is that the central bank appears to be more decisive in its fight against rising inflation and in moving closer to a flexible exchange rate system,” he said.

The central bank also said it would phase out a rule mandating the use of letters of credit to finance imports by December.

The rule, an effort to preserve scarce dollars, caused a major slowdown in imports of everything from consumer goods to industrial components, and left some basic goods stuck in ports.

To deepen the foreign exchange market and improve its liquidity, the central bank said it would work to build the foundations of a derivatives market.

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