Collapse! The exchange rate plummeted!

At the same time, Egypt's central bank took a "violent interest rate hike" move, significantly raising the key interest rate by 600 basis points to 27.25%, aiming to alleviate the country's long-term foreign exchange shortage and seeking to obtain tens of millions of dollars from the International Monetary Fund. billion in new loans.

At present, the Egyptian pound has joined the "five major currency collapse clubs in the world" (Argentina, Brazil, Zimbabwe, Lebanon, Egypt). The main causes of its collapse are roughly the same as those in other countries: hyperinflation, heavy debt burden, and extreme shortage of foreign exchange. According to a report by BMI Research, a subsidiary of Fitch Solutions, Egypt's average inflation rate is expected to be as high as a staggering 34.1% in 2023. In addition, Egypt is facing an urgent debt crisis. From 2024 to 2026, Egypt will need to repay a total of US$71.57 billion in foreign debt (approximately RMB 515.2 billion).

On March 6, local time, the Egyptian currency, the Egyptian pound, suddenly collapsed. The exchange rate of the Egyptian pound against the US dollar plummeted by nearly 40%, once falling to 50.55 Egyptian pounds per US dollar, a record low. At the same time, the Egyptian Stock Exchange EGX 30 index also closed sharply down 3.02% to 29743.11 points.

On the news, the Egyptian Central Bank announced an interest rate hike at an extraordinary meeting and stated that it would allow market forces to determine the foreign exchange rate.

The Central Bank of Egypt announced on Wednesday that in order to alleviate the severe foreign exchange shortage and obtain billions of dollars in new loans from the International Monetary Fund, the bank decided to significantly increase the key interest rate by 600 basis points to 27.25%. Previously, the International Monetary Fund had recommended that Egypt tighten monetary policy to combat an inflation rate of nearly 30% and promote official exchange rate flexibility.

However, this decision quickly triggered a violent reaction in the market. The exchange rate of the Egyptian pound plummeted, and the exchange rate of the Egyptian pound against the US dollar fell below the 50 mark in many banks. It is worth noting that over the past year, the official exchange rate of the Egyptian pound has been maintained at a level of 31 Egyptian pounds per US dollar. This adjustment is unprecedented.

It is worth noting that the exchange rate of the Egyptian pound on the black market has fallen to 63 Egyptian pounds per US dollar, and once fell below 70 Egyptian pounds in January this year, showing the market's pessimistic expectations for the Egyptian economy.

Looking back on the past two years, Egypt has suffered from an economic crisis and hyperinflation. Despite the government's policy of raising interest rates, the depreciation trend of the Egyptian pound has not been curbed. Since 2022, the official exchange rate of the Egyptian pound has experienced three significant depreciations, with depreciations as high as 14%, 19% and 17% respectively. This speed has set a new record for global currency depreciation. The market generally believes that the official exchange rate of the Egyptian pound is still likely to depreciate further in 2024.

Previously, Egypt's official exchange rate had been maintained at 31 Egyptian pounds per US dollar. However, according to Société Générale’s forecast, Egyptian officials may fix the new exchange rate at a range of 40 to 45 Egyptian pounds per US dollar, which means that the potential depreciation space of the Egyptian pound’s official exchange rate will reach 25% to 30%, which It would be the largest depreciation since 2016.

Analysts at S&P Global Market Intelligence expect Egypt to further tighten monetary policy in 2024 to combat inflation and offset price increases caused by the depreciation of the Egyptian pound. Analysts predict that Egypt's inflation rate will reach about 30.3% this year, which is slightly lower than the 33.9% in 2023, but still high.