Morgan Stanley Says Egypt Deal with IMF "Very Close" After Rate Hike

Morgan Stanley believes that the Central Bank of Egypt's raising of the interest rate on Thursday by 200 basis points indicates the nearness of reaching an agreement with the International Monetary Fund and the move towards a flexible exchange rate for the pound.

According to a recent report issued by one of the largest Wall Street banks, the interest rate hike by the CBE, the first since August 2023, is expected to be followed by an adjustment in the exchange rate of the Egyptian pound, based on previous models in 2016, October 2022, and January 2023.

Last week, the Monetary Policy Committee of the Central Bank of Egypt decided, in its first meeting of the current year, to raise interest rates by 200 basis points, raising the overnight deposit and lending rates, and the Central Bank’s main operation rate, to their highest rates ever at levels of 21.25%, 22.25%, and 21.25%. .75%, respectively. It also raised the credit and discount rates to 21.75%.

The latest increase in interest rates came amid negotiations that were ongoing in Cairo between the International Monetary Fund team and the Egyptian authorities and extended for two weeks before announcing their conclusion, and in the midst of widespread inflationary pressures, despite the downward trend in prices since September, but the impact resulting from geopolitical uncertainty and shipping disruptions across the Red Sea are fueling upside risks to inflation expectations.

The Morgan Stanley report explained that moving towards a flexible exchange rate for the pound is a major requirement for the IMF, and that moving the official exchange rate would enable Egypt not only to disburse the loan amounting to $3 billion, but also to obtain a larger loan from the Fund worth $10 billion.

Following the Egyptian Central Bank’s move, International Monetary Fund President Kristalina Georgieva said that Egypt’s program is the Fund’s “top priority,” and that talks on increasing the program are making progress, as work is currently underway on implementation details.

The flow of positive news may ease some pressure on the Egyptian pound, and obtaining the Fund’s loan, with a more effective adjustment of the official exchange rate, would narrow the gap between the official exchange rate and the price in the parallel market, and it may also open up more foreign currency supplies from The parallel market, according to the report.

Today, the price of the dollar on the parallel market dropped from EGP 72 to the dollar to around EGP 58.03. Also, gold prices witnessed a significant drop, after the announcement of EU, IMF support support to the Egyptian economy.

However, Morgan Stanley believes that the adjustment of the pound's exchange rate will be limited at first, followed by a gradual transition to a more flexible rate.