Egypt is committed to maintaining a flexible exchange rate in order to ensure a sufficient supply of foreign currency.
According to Rami Aboulnaga, deputy governor of Egypt’s central bank, this commitment is a crucial requirement of an $8 billion loan program that Egypt has signed with the International Monetary Fund (IMF).
Read more: Egypt’s GDP expected to reach 4 percent in FY 2024/2025: Ministry of Finance report
On March 6, Egypt allowed its currency to significantly weaken after maintaining a fixed exchange rate with the U.S. dollar for almost a year. The overvalued currency had caused a severe shortage of foreign currency and had negatively impacted the import of essential goods, such as manufacturing inputs and consumer products.
The currency devaluation was part of a support program agreed upon with the IMF, which came two weeks after Egypt announced a $35 billion real estate investment from the UAE. The IMF stated that the disbursement of loans under the program would be contingent upon Egypt maintaining a flexible exchange rate.
Ensuring access to foreign currency liquidity
During an interview with the Atlantic Council, Deputy Governor Rami Aboulnaga highlighted Egypt’s determination to keep its currency flexible. He stated that the market would determine the currency’s price, irrespective of whether it was considered fair or not. Egypt aims to ensure that various economic entities can access foreign currency liquidity, thereby avoiding the shortages and bottlenecks experienced in the past.
Aboulnaga said this as a crucial objective and benchmark for Egypt. He mentioned that the central bank had devalued the currency three times between March 2022 and March 2023 but had reverted to a fixed rate on each occasion, despite commitments to the IMF to adopt a flexible system.
The fixed exchange rate led to the emergence of a robust black market, with the currency weakening to as low as 72 pounds to the dollar, compared to the official rate of 30.85 pounds.
The uncertainty surrounding the exchange rate caused Egyptians living abroad to withhold their earnings, significantly impacting one of Egypt’s primary sources of foreign exchange. Remittances decreased by nearly $10 billion in the 12 months leading up to June 2023, totaling $22 billion.
Aboulnaga noted that there is currently a resurgence in interbank volumes and that the market is gradually stabilizing, with liquidity returning to the market.
For more news on the economy, click here.
