Egyptian pound falls 11% after Ukraine war calls for dollar flight

CAIRO, March 21 (Reuters) – Egyptian pound depreciated more than 11% on Monday after weeks of pressure on the currency as foreign investors withdrew billions of dollars from Egyptian treasury markets following Russia’s invasion of Ukraine.

The pound fell to 17.72-17.82 against the dollar, refinitive data showed after trading at around 15.7 pounds to the dollar since November 2020.

The central bank also raised overnight interest rates by 100 basis points in a surprise monetary policy meeting.

Egypt was in talks with the International Monetary Fund about possible aid, people close to the talks said, but it did not announce a formal request.

Analysts at investment bank JP Morgan said two weeks ago that the pound was overvalued by 15% and that a devaluation might be necessary, adding that Egypt may need further assistance from the IMF if financial market pressure intensifies. read more

The weakening of the pound on Monday could catalyze the inflow of foreign currency, while investors who already had money in Egyptian treasuries are unlikely to sell now, said Farouk Soussa, senior economist at Goldman Sachs.

“The move is designed to capture liquidity in the market and attract investors who can sit on the sidelines and wait for the pound to fall,” he said.

But it will also likely contribute to inflation and possible local dollarization. “The big question is whether this is enough, or whether it is more necessary to inspire portfolio investors,” he said.

HEAR SHOW IMPORT PRICES

Lack of dollars has led to blockades at Egyptian ports after importers were unable to obtain foreign currency needed for credit cards to get their goods cleared, bankers said.

The war in Ukraine also left Egypt with higher costs for its essential white import needs as well as a loss of tourism revenue from Russian and Ukrainian visitors to Red Sea resorts. Russia and Ukraine are the main suppliers of wheat to Egypt, which is often the largest importer in the world.

Higher wheat prices could double nearly $ 5.7 billion in annual government spending on wheat imports, according to a study last week by the International Food Policy Research Institute, which strains government finances and pushes up inflationary pressures.

Headline inflation has accelerated to its highest level in almost three years, recording 8.8% last month and reaching the upper limit of the central bank’s 5-9% target range.

Prime Minister Moustafa Madbouly on Monday set the price of non-subsidized bread at 11.5 Egyptian pounds ($ 0.66) per kilogram, according to a statement from his office. Prices jumped as much as 25% due to disruptions to white imports caused by Russia’s offensive in Ukraine. read more

The central bank cites global inflationary pressure exacerbated by the war in Ukraine for its rise in rates, which raised the overnight rate to 10.25% and its overnight deposit to 9.25%.

State-owned Banque Misr and National Bank of Egypt said Monday that they offer deposit certificates with yields of 18%.

Additional reporting by Ahmed Ismail; Edited by Ed Osmond and Dominic Evans

Our Standards: The Thomson Reuters Trust Principles.