What’s Happening in Egypt? Why Is Egypt’s Currency Falling Faster than Previous Projections?

It all comes down to 4 main reasons why the Egyptian currency is falling harder than ever; Growing Financing Gap, Rising Debts, Foreign Outflows, & New IMF loan)

According to Fakhri Al-Feqi, head of the parliamentary planning and budget committee, Egypt’s financing gap amounts to about $25bn, of which $15bn are installments and debts due during the current year, and the rest is from the deficit in the balance of payments, which is largely due to the weakness of domestic savings, which represent only 13% of GDP.

A report released by the World Bank at the beginning of July indicated that Egypt’s foreign debt had reached unprecedented levels of nearly $158 billion as of the end of March. Egypt has committed to repaying $33 billion in foreign debt in a one-year period, from March 2022 to March 2023, according to the report (which accounts for almost the country’s foreign currency reserves, estimated now at $33.5 billion as of December 2022)

The country has seen about $20 billion in foreign outflows after investors in local debt exited. When the Fed raises interest rates, hot money speculators shift their dollar, or hard currency, investments from Egypt to US treasury bonds in search of higher returns. Currently, the Fed offers higher interest rates than the central banks of most of the world’s large economies.

Egypt has reached an agreement with the IMF for a $3 billion in October 2022 to implement comprehensive economic policies and reforms for a 46-month period during Egypt’s ongoing economic struggles. Devaluing the EGP was among the reform policies as Egypt shifts to a flexible exchange rate regime.

IMF Loan, Was It the Biggest Driver Behind Devaluation? And Was It Inevitable?

The series of policy tools deployed so far — allowing a fall in the currency, restricting imports, and attracting Gulf investments — have done little to ease the external pressures. A fresh program could provide additional funding and give extra assurances to investors by way of a structural reform program endorsed by the IMF.

According to Hany Geneina, an economist and lecturer at the American University in Cairo, there are many benefits to resorting to the IMF:

The value of interest on these debts. The interest on the IMF loan is close to the interest rate on US treasury certificates. According to Geniena, the interest rate for the loan is likely between 3-4% at present, in contrast to the 15% interest rates on government debt instruments, of which hot money comprises a significant portion.

Is Egypt the Only Country in MENA Region Suffering from Currency Devaluation?

Egypt is certainly not alone. The IMF revised its previous estimates of the growth rate of the global economy for the years 2022 and 2023, as well as reduced its forecasts for growth rates in about 143 countries in April 2022.

The April 2022 issue of the World Bank’s “Commodity Market Outlook” indicates that the increase in energy prices over the past 2 years can be considered the largest since the 1973 oil crisis and that the recent increases in the prices of food commodities and fertilizers are the largest since 2008. The World Bank noted that the Russian-Ukrainian crisis had prompted a change in trade, production, and consumption patterns and prices are expected to remain at those high levels until 2024.

Yet, according to Bloomberg and subsequent to the Ukrainian crisis, the EGP was the most devalued currency against the US$ among the “Emerging Markets”.