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Egypt cut its currency by 14% after the Ukrainian war prompted the dollar to fly

  • The move could pave the way for an IMF agreement, analysts say
  • Central bank raises rates by 100 basis points overnight
  • Rising wheat import prices drive inflation
  • Government sets prices for unsubsidized bread

Cairo, March 21 (Reuters)-Egypt devalued the pound 14% on Monday after foreign investors withdrew billions of dollars from Egypt’s financial market and put pressure on the currency due to Russia’s invasion of Ukraine ..

Refinitiv data show that the pound has fallen against the dollar to 18.17-18.27 after trading at around £ 15.7 against the dollar since November 2020.

The central bank also raised overnight interest rates by 100 basis points at a surprising monetary policy meeting.

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Egypt’s central bank governor, Tarek Amel, said at a news conference that the pound had been “corrected” to reflect global and regional developments. The amendments will help make exports competitive and maintain foreign currency liquidity.

Egypt is discussing possible support with the International Monetary Fund, and people close to the negotiations have said, but have not announced a formal request.

“This is a good move, as the devaluation of the pound is in line with its fair value and could pave the way for new IMF trading,” said James Swanston of Capital Economics.

“But whether policymakers could move the pound more freely, or continue to control the pound, re-accumulate external imbalances, and lead to a gradual devaluation in the future as it is today. Will be important, “Swanston said.

The IMF in Cairo did not get immediate comments.

Crown Prince Abu Dhabi Mohammed Binzaid Arnahan arrived in Egypt on Monday and met with President Abdel Fatta Arsisi. The UAE, along with Saudi Arabia, was a strong financial supporter of Egypt. Sisi flew to Riyadh to meet with Saudi leaders. March 8th.

Goldman Sachs senior economist Farouk Susa said Monday’s depreciation of the pound could boost foreign currency inflows, but investors already funded by Egypt’s Treasury will not sell now. Stated.

“The move is aimed at trapping market liquidity and attracting bystanders waiting for the pound to bottom out,” he said.

But it also has the potential to add inflation and possible local dollarization.

“The big question is whether this is enough, or maybe more to seduce portfolio investors,” Susa said.

Higher wheat import prices

According to bankers, the Egyptian port was closed due to a lack of dollars because importers couldn’t get the foreign currency needed for the letter of credit and couldn’t liquidate the goods.

The war in Ukraine also faced Egypt with higher costs due to its substantial need for wheat imports and loss of tourism revenue from Russian and Ukrainian visitors to the Red Sea resort. Russia and Ukraine are the major suppliers of wheat to Egypt. The world’s largest importer.

Rising wheat prices could nearly double the state’s annual spending on wheat imports to $ 5.7 billion, putting pressure on government finances and inflationary pressure, according to a study by the International Food Policy Research Institute last week. Is fueling.

Headline inflation has accelerated to its highest level in almost three years, hitting 8.8% last month, reaching the central bank’s 5-9% target range.

The Treasury said in a statement Monday that it would allocate £ 130 billion “to mitigate the effects of global economic challenges.”

This package includes fixing the import customs exchange rate and production requirements for basic commodities to £ 16 per dollar and reducing capital gains from the initial public stock offering.

Prime Minister Mostafa Madburi has set the price of unsubsidized bread on Monday at £ 11.5 ($ 0.66) per kilogram. According to a statement from his office, prices soared by 25% as the Russian attack on Ukraine disrupted wheat imports.read more

The central bank said the rise in interest rates due to the war in Ukraine amplified global inflationary pressures, raising overnight lending rates to 10.25% and overnight deposit rates to 9.25%.

State-owned Banque Misr and the National Bank of Egypt said they are offering certificates of deposit at a yield of 18% on Monday.

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Additional reports by Ahmed Ismail; edited by Ed Osmond, Dominic Evans, Leslie Adler

Our Criteria: Thomson Reuters Trust Principles.

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