On March 6, local time, the Egyptian pound suddenly collapsed, reaching a historical low of 50.55 Egyptian pounds per U.S. dollar. The Egyptian Stock Exchange EGX 30 index fell sharply that day, closing down 3.02% at 29,743.11 points.
Behind the currency collapse was the decision by the Egyptian Central Bank at an extraordinary meeting to liberalize exchange rate controls and allow market forces to determine the Egyptian currency exchange rate.
On March 6, local time, the Egyptian Central Bank announced that it would raise the key interest rate by 600 basis points and allow the exchange rate to be determined by the market to ensure a smooth transition to a flexible inflation targeting system. This is also another substantial interest rate hike after the 200 basis points hike in February this year.
After the news was announced, the exchange rate of the Egyptian pound against the US dollar quickly 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. By comparison, the Egyptian pound to U.S. dollar exchange rate is priced at about 63 Egyptian pounds to the U.S. dollar in the parallel exchange market.
Over the past two years, Egypt has experienced an economic crisis and hyperinflation, with the Egyptian pound continuing to lose value despite a policy of raising interest rates. The official exchange rate of the Egyptian pound has experienced three depreciations of 14%, 19% and 17% since 2022, setting a record for global currency depreciation. The market believes that its official exchange rate will depreciate again in 2024.
Gergely Urmossy, emerging markets strategist at Societe Generale, said it could take days or weeks for the exchange rate to stabilize near a new equilibrium.
