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36%! Inflation is soaring in this country! severe currency devaluation
2024-03-11
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On March 10, local time, data released by Egypt’s Central Bureau of Public Mobilization and Statistics showed that Egypt’s annual inflation rate rose to 36% in February, a significant increase from 31.2% in January. The country's annual urban consumer inflation rate also rose significantly, rising from 29.8% in January to 35.7% in February.
Egypt’s Central Bureau of Public Mobilization and Statistics stated that the main reason for the increase in inflation is the increase in prices in key industries. Among them, the price of meat and poultry increased by 25.0%, cereals and bread increased by 14.2%, fish and seafood increased by 11.5%, dairy products such as eggs and cheese increased by 12.8%, while food and beverage prices increased by 50.9% year-on-year.
It is worth mentioning that the Egyptian Central Bank continues to "violently raise interest rates" and has doubled interest rates since 2022. On March 6, local time, the Central Bank of Egypt raised the key interest rate by another 600 basis points.
The interest rate had just been raised significantly by 600 points.
On March 6, local time, the Monetary Policy Committee of the Central Bank of Egypt decided at an extraordinary meeting to increase the overnight deposit and loan interest rates and the central bank's main operating interest rates by 600 basis points each. After the increase, the overnight deposit and loan interest rates are 27.25% and 28.25% respectively, and the main operating interest rate is 27.75%.
Egyptian pound falls below 50 mark against US dollar
While raising interest rates, the Egyptian Central Bank announced that it would allow the Egyptian pound to be priced fairly according to market mechanisms.
On that day, the exchange rate of the Egyptian pound plummeted rapidly, once plummeting by about 40%, and the exchange rate of the Egyptian pound against the US dollar in many banks fell below the 50 mark. Over the past year, the official exchange rate of the Egyptian pound has been controlled at around 31 Egyptian pounds to the dollar.
It is worth noting that on the black market, the exchange rate of the Egyptian pound has fallen to 63 Egyptian pounds per US dollar, and even fell below 70 Egyptian pounds in January this year.
Over the past two years, Egypt has experienced an economic crisis and hyperinflation, with the Egyptian pound still depreciating despite interest rate hikes.
British financial data show that the current exchange rate of the Egyptian pound against the US dollar has fallen below the 50 mark, reporting at 49.3693.
Why did Egypt come to this point?
At present, the Egyptian pound has joined the "global five major currency collapse club" for basically the same reasons: hyperinflation, high debt, and extreme shortage of foreign exchange.
Egypt is the most populous country in the Arab world, with approximately 110 million people, but 60% of them live below or close to the poverty line. Since the outbreak of the Russia-Ukraine conflict, Egypt, which relies heavily on food imports from Russia and Ukraine, has suffered a violent blow.
Due to factors such as rising food prices, Egypt's international reserves continued to plummet, and the spillover effects of the conflict directly triggered Egypt's domestic inflation. According to a report by BMI Research, a subsidiary of Fitch Solutions, Egypt's average inflation rate is expected to be as high as 34.1% in 2023.
International Monetary Fund Managing Director Kristalina Georgieva said Egypt's fight against inflation remains a top priority.
In October 2023, a new round of Palestinian-Israeli conflict broke out, once again impacting the Egyptian exchange rate market. Ramona Mubarak, head of country risk for the Middle East and North Africa region at Fitch Solutions, believes that Egypt is a country greatly affected by the Palestinian-Israeli conflict, and the conflict has increased the country's geopolitical risks.
At the same time, the outbreak of the Red Sea crisis "exacerbated" the Egyptian economy, directly leading to a sharp decline in trade in the Suez Canal. In January this year, Egypt's related revenue plummeted 44% year-on-year.
Due to the extreme shortage of foreign exchange, Egypt's imports dropped, resulting in a significant reduction in the trade deficit. According to data from the Central Bank of Egypt, Egypt's non-oil imports dropped to US$57.4 billion in the 2022/2023 fiscal year from US$73.8 billion in the previous fiscal year, a decrease of 22.2%.
In addition, the Federal Reserve’s tightening monetary policy has exacerbated Egypt’s foreign exchange shortage. The Federal Reserve will continue to raise interest rates in 2023 and maintain high interest rates, causing capital outflows from other countries, especially developing countries. It is understood that about $20 billion in hot money fled the Egyptian market as investors sought higher interest rates elsewhere. Goldman Sachs believes that these funds did not return to Egypt in 2023, and that another $1.6 billion in funds fled.
In response to an extreme shortage of foreign currency, the government announced a plan to rely on Suez Canal revenues, remittances, Commodity exports and other resources will generate US$191 billion in foreign exchange by 2026.
In addition, Egypt's debt crisis is also imminent. Egypt should repay foreign debts of up to US$29.23 billion, US$19.43 billion, and US$22.94 billion in 2024, 2025, and 2026 respectively.
In December 2023, the Egyptian presidential election ended. Current President Sisi won the presidential election with 89.6% of the vote and started a new six-year term. Analysts pointed out that Sisi's third consecutive election as Egyptian president shows that the Egyptian people have a positive attitude towards his ability to govern, and is beneficial to the advancement of economic reforms and the stability of foreign economic and trade cooperation.
Mohamed Shadi, an economic expert at the Habtoor Research Center in Cairo, said: "The collapse of the Egyptian pound and soaring inflation are the most direct and urgent issues facing the president's new term." Some analysts even believe that the meeting, originally scheduled for early 2024, The reason the election was brought forward was to implement economic changes in a timely manner.
A previous statement from the Egyptian Central Bank stated that the latest policy is part of a series of comprehensive economic reforms adopted in coordination with the government and has the firm support of multilateral and bilateral partners. In order to prepare for the successful implementation of these measures, sufficient funds are available to take advantage of foreign exchange liquidity.
On February 23, the Egyptian government signed an agreement with the United Arab Emirates to develop a prime location on the Mediterranean coast, and is expected to receive US$35 billion in investment in the next two months.
The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.
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