The Central Bank of Egypt (CBE) issued a statement, on Thursday morning, announcing reform measures to ensure macroeconomic stability and achieve sustainable and comprehensive economic growth, floating the Egyptian pound.
The Monetary Policy Committee held an extraordinary meeting at on Thursday after which the Central Bank issued a statement.
The global economy faces many shocks and challenges that it had not witnessed for years, as global markets were recently exposed to the coronavirus outbreak and closure policies, then followed by the Russian-Ukrainian conflict, which had severe economic repercussions, and caused pressure to the Egyptian economy, said the statement.
Egypt faced upon the crisis an exit for foreign investors’ capital as well as an increase in commodity prices, so the Central Bank has taken reform measures to ensure macroeconomic stability and achieve sustainable and inclusive economic growth, it continued.
To achieve this, the exchange rate will reflect the value of the Egyptian pound against other foreign currencies based on supply and demand within the framework of a flexible exchange rate system, with priority given to the main objective of the Central Bank of achieving price stability. This will enable the Central Bank of Egypt to work to create and maintain adequate levels of international reserves.
The Central Bank of Egypt will gradually cancel the instructions issued on February 13, 2022, regarding the use of documentary credits in import financing operations, until l completely cancelling it in December 2022.
This is an incentive to support economic activity in the medium term, the statement continued.
The Central Bank will also work on building and developing the financial derivatives market with the aim of deepening the foreign exchange market and raising levels of foreign currency liquidity.
In order to support the goal of price stability in the medium term, the Monetary Policy Committee decided, in its extraordinary meeting, to raise the overnight deposit and lending rates and the central bank’s main operation rate by 200 basis points to reach 13.25 percent, 14.25 percent and 13.75 percent respectively. The credit and discount rate was also raised by 200 basis points to 13.75 percent.
The increase in global and local prices will lead to a higher general inflation rate than the target by the Central Bank of 7 percent (+2 percentage points) on average during the fourth quarter of 2022, the statement said.
The committee stressed that the objective of raising interest rates is to contain the inflationary pressures caused by the demand side, the high growth rate of domestic liquidity, inflationary expectations and the secondary effects of supply shocks.
The Central Bank said that the Monetary Policy Committee will continue to announce the inflation target rates, that it started since 2017, in line with the targeted decline in inflation rates. This inflation targeting policy has succeeded in reducing inflation rates until the recent global shocks occurred .
According to the statement, achieving low and stable inflation rates in the medium term supports the real income of the citizen and preserves the competitiveness gains of the Egyptian economy.
Egypt devalued its currency by 48 percent in 2016, allowing it to float freely in order to meet a key demand by the International Monetary Fund to secure a three-year US$12 billion loan.
The CBE announced the devaluation of the Egyptian pound for the second time in March by nearly 17 percent.
The head of the International Monetary Fund (IMF) mission to Egypt announced in a press conference, on October 27, held with Egypt’s Prime Minister Mostafa Madbouly, the governor of the Central Bank of Egypt and a number of ministerial officers, that they came up with an agreement that has been concluded with Egypt on a loan worth US$3 billion over a period of six months.
Egypt has obtained loans from the IMF, amounting to about $20 billion since 2016, as part of the implementation of the economic and social reform program.
It also obtained quick financing to face the repercussions of coronavirus pandemic, and has already started paying the first loan installments.