The Central Bank of Egypt (CBE)’s Monetary Policy Committee (MPC) is scheduled to convene on Thursday amid the ongoing depreciation of the Egyptian pound and discussions with the International Monetary Fund (IMF) to revive their agreement. The gap between the official and parallel markets’ exchange rates for the currency against the U.S. dollar has widened, with the rate reaching approximately EGP30.85 in banks and up to EGP68 in the parallel market on Monday.
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Reports are circulating that Egypt has reached a “preliminary formula” with the IMF for a modified loan program. This formula includes an urgent devaluation of the pound and an increase in the program’s value from the current $3 billion to $7 billion or more, along with an extension of the program’s duration. This formula is expected to be presented to the political leadership. The Arab World Press disclosed that this agreement was reached during a meeting between Prime Minister Mostafa Madbouly, the IMF delegation, Central Bank Governor Hassan Abdalla, and Finance Minister Mohamed Maait.
The urgent devaluation of the pound is seen as a crucial step to prevent a widening gap between the official and parallel exchange rates. The official stated that this decision would be presented to the political leadership for consideration. The IMF delegation has expressed support for the government’s efforts to address the trade balance deficit through its debt policies. However, they have requested that national projects prioritize decreasing opportunities for external debt without generating sufficient dollar income from their operation.
Capital Economics report
A recent report from Capital Economics suggested that the Central Bank of Egypt would maintain its interest rates unchanged at the upcoming meeting, unless a new agreement with the IMF was announced. The report noted that discussions with the IMF were progressing rapidly, and there was a possibility of revealing a new agreement around the time of the MPC meeting, potentially accompanied by a devaluation of the pound against the dollar.
Unchanged interest rates expected
In a Reuters poll of analysts, the majority expected the CBE to keep the interest rates on one-night deposits unchanged. The average forecast from the survey indicated that the deposit interest rates would remain at 19.25 percent, while lending interest rates would stay at 20.25 percent during the MPC’s regular meeting. However, six analysts projected an increase of between 100 and 300 basis points.
Simon Williams, chief economist at HSBC, stated that the MPC’s decision would depend on the outcome of the IMF discussions, making it difficult to predict the exact course of action. He also mentioned that the favorable underlying effects, such as a slowdown in average annual urban inflation in Egypt to 33.8 percent last year, reduce the likelihood of interest rate hikes, especially considering signs of slowing growth.
Farouk Soussa, economist at Goldman Sachs, suggested that raising interest rates by 300 basis points would send a positive message about Egypt’s intentions and potentially pave the way for an agreement with the IMF.
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