Egyptian Pound Collapse: Egypt Struggles with Severe Economic Challenges

The Egyptian currency has collapsed.

On March 6th local time, the Egyptian currency, the Egyptian Pound, suddenly collapsed, with its exchange rate against the US dollar plummeting by nearly 40%, at one point dropping to 1 US dollar to 50.55 Egyptian pounds, hitting a historic low.

The Central Bank of Egypt simultaneously announced a ‘violent interest rate hike’, raising the key interest rate by 600 basis points to 27.25%, hoping to alleviate the country’s severe shortage of foreign exchange and obtain billions of dollars in new loans from the International Monetary Fund.

Analysts from a market intelligence company predict that Egypt will further tighten its monetary policy in 2024 to combat inflation and offset the price increases caused by the devaluation of the Egyptian Pound. They forecast that the country’s inflation rate will reach around 30.3% this year, slightly lower than the 33.9% in 2023.

 

Sudden Exchange Rate Plunge

 

On the news front, the Central Bank of Egypt announced a rate hike at an emergency meeting, stating that it would allow market forces to determine the exchange rate.

 

Over the past two years, Egypt has experienced an economic crisis and rampant inflation. Despite implementing rate hike policies, the Egyptian Pound has continued to depreciate. The official exchange rate of the Egyptian Pound has depreciated by 14%, 19%, and 17% three times since 2022, setting a record for the speed of currency depreciation globally. Market expectations suggest that the official exchange rate will depreciate again in 2024.

 

Data shows that the Egyptian government needs to repay external debts totaling up to $29.23 billion, $19.43 billion, and $22.94 billion in 2024, 2025, and 2026 respectively. However, in stark contrast, the Egyptian government’s foreign exchange reserves are clearly insufficient.

 

This casts a shadow over a series of economic reforms and measures to liberalize currency controls in Egypt, making the Egyptian Pound potentially another ‘collapse currency’.

 

 

Continuous Capital Outflows, Egypt Struggles with Economic Challenges

 

Experts believe that external factors such as the Russia-Ukraine conflict and the beginning of the Federal Reserve’s interest rate hike cycle will continue to cast a shadow over Egypt’s economic recovery.

 

Since the locust plague in 2019, Egypt has been hit by most of the unfortunate events on Earth. Locust plagues, the COVID-19 pandemic, the Russia-Ukraine conflict, the Israeli-Palestinian conflict, the closure of the Bab-el-Mandeb Strait, and a cliff-like drop in revenues from the Suez Canal. Egypt lacks domestic industries, heavily relies on food imports, and is severely dependent on remittances, making it susceptible to any disturbances in the international arena.

 

Firstly, significant increases in energy and food prices, along with a sharp decline in tourism, will increase fiscal pressure on Egypt. Egypt faces challenges such as reduced tourism inflows, rising food prices, and difficulties in financing.

 

Egypt is a major wheat importing country in the world, with 80% of its wheat imports coming from Russia and Ukraine. Additionally, Egypt is a net importer of crude oil and its derivatives, importing over 120 million barrels of crude oil annually, posing a greater burden on government finances.

 

Secondly, the initiation of interest rate hikes by the Federal Reserve is bound to exacerbate capital outflow pressures from emerging markets. Emerging economies with weak risk management capabilities may face the risk of massive capital flight and financial market turmoil, putting continuous pressure on the Egyptian economy.

 

 

‘Currently, there is no successful practice to completely resolve this vicious cycle’, says a manager of an emerging market investment fund. Even though some countries have adopted relatively aggressive measures to liberalize currency controls and implement economic reforms, the outcomes remain uncertain. Egypt’s macroeconomic situation will continue to face challenges in 2024 and 2025, and Egypt’s credit situation remains worrying.

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