Egypt hikes rates amid talks of IMF deal, another devaluation

AFRICAN BUSINESS AND ECONOMYFebruary 1, 2024 at 10:58 PM UTC

TLDR

Egypt surprises by raising interest rates for the first time since August, indicating potential progress on an IMF rescue package.
The move may pave the way for a potential currency devaluation and signals efforts to create favorable conditions for IMF talks.
Analysts suggest the aim is to augment the existing $3 billion loan, with the potential for a broader package exceeding $10 billion, possibly involving support from the World Bank.

In a surprising move, Egypt has raised interest rates for the first time since August, defying expectations and potentially hastening progress on a more substantial rescue package with the International Monetary Fund (IMF), while also paving the way for a potential currency devaluation.

The Monetary Policy Committee announced a 200 basis points increase in the benchmark deposit rate to 21.25% and the lending rate to 22.25%. This unexpected decision, predicted only by Goldman Sachs Group and Morgan Stanley in a Bloomberg poll of economists, comes amidst a three-month slowdown in inflation, raising concerns about the strain on public finances caused by higher borrowing costs.

However, analysts suggest that the move may signal Egypt's efforts to create favorable conditions for advancing talks with the IMF in Cairo, aiming to augment its existing $3 billion loan, with the potential for a broader package exceeding $10 billion, possibly involving support from the World Bank.

Key Takeaways

As Egypt grapples with an ongoing economic crisis, severe shortages of hard currency are exacerbating the situation, adding significant pressure on the Egyptian pound. The currency has experienced three devaluations since March 2022, leading to a 50% reduction in its official value to around 30.9 per dollar. However, in the black market, the pound's value is even weaker, fluctuating between 65 and 70 this week. Ongoing discussions with the IMF are centered around two delayed reviews of a deal established over a year ago. These negotiations focus on crucial reforms, including the need for Egypt to implement tighter monetary and fiscal policies and transition towards a more flexible exchange rate regime. Signifying progress toward these objectives, the cabinet approved a proposal on Wednesday to cut spending on state investments and suspend new projects until at least July.

Egypt

Devaluation

IMF

Goldman Sachs

Morgan Stanley

Bloomberg

Economy