From 9 to 23 pounds per dollar … How did the Egyptian currency lose 150% of its value in 6 years?

Losing 17% of its value in hours, the Egyptian pound plunged Thursday after the central bank said it was moving towards a more flexible currency system in a radical political reform that helped the government to sign an agreement with the International Monetary Fund.

The pound quickly fell to an all-time low against the dollar at 23, outpacing the magnitude of its depreciation on March 21, when the government began a second. round partial listing.

On the same day, during an extraordinary meeting, the central bank was raising borrowing costs by 200 basis points, but the real interest rate of the state is still below. zerominus 1.75%.

Prior to recent developments, some of the largest banks in the world claimed that the pound was “overvalued,” as the continued appreciation of the dollar affected the currencies of Egypt’s trading partners and their country counterparts. in via of development. Before devaluing it by about 15% last March, Egypt kept its currency stable against the dollar for about two years.

floating trip

The modern “float” journey began in November 2016, when the pound depreciated by nearly 50% from around 9 pounds per dollar to 13 pounds, after which it lost more than 100% of its value. in a few weeks, surpassing the level of 19 pounds per dollar. It was followed by another step last March that cut it by around 15%, to get to yesterday’s float, which nibbled a further 17% of the pound’s value and took it to 23 per dollar for the first time. , so that the Egyptian currency lost more than 150% in about 6 years and almost 200% since the beginning of 2016.

To support an economy damaged by the repercussions of the Russian invasion of Ukraine, Egypt reached an expert-level agreement worth $ 3 billion with the International Monetary Fund, which preferred a more flexible exchange rate such as condition for financial support.

Egypt will also receive $ 5 billion from international partners, government officials said Thursday in a press conference, helping the country fill funding gaps. In addition, according to the International Monetary Fund, Egypt has requested $ 1 billion from the newly created Sustainability Fund.

Goldman Sachs Group and Bank of America have estimated that Egypt may need to insure $ 15 billion. The Gulf states have already committed over $ 20 billion in deposits and investments.

Descending path expected

Goldman Sachs economists said Egypt’s move on Thursday was a surprise in terms of timing and even bigger than they expected. “This is likely to lead to significant short-term weakness in the pound,” they said in a relationship.

In the undeliverable futures market, the 12-month sterling contract fell to 26.2 per dollar, while the three-month contract fell to 23.9.

The question now is whether the magnitude of Egypt’s financial support is sufficient to restore investor confidence in one of the most important emerging markets.

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