Middle East Eye: Egyptian Economy Facts Crisis After US Interest Rates Raise | Economy

Economists expect currency depreciation, rising interest rates and rising foreign debt in Egypt, as the country is also struggling with the impact on wheat prices as a result of the Ukraine war.

The Middle East Eye website said in a report that the Egyptian economy is expected to be hit hard by the latest US Federal Reserve rate hike, which took place by 0.5% last Wednesday, the second hike in less than two months and is the highest. since 22 years, as Egypt is one of the many emerging markets that are expected to suffer under the move.

The website indicated that the Federal Reserve, after a two-day meeting, announced that it would reduce its $ 9 trillion asset portfolio from next month in an effort to reach its highest rise in inflation in the United States. , to limit. levels in 4 decades.

Economic experts told the Middle East Eye the impact on Egypt will vary from the flight of foreign capital and the weak interest of investors in domestic debt instruments, in addition to additional pressure on the national currency Inflation in a country where a third of its 104 million people live in poverty.

Low value of the pound

According to the website, local economists expect that the recent increase in the Federal Reserve interest rate will lead to additional pressure on the Egyptian pound, and they pointed to the need for the Central Bank of Egypt to devalue the pound more to maintain and prevent foreign exchange liquidity that people are accumulating dollars, a phenomenon known as “dollarization.”

The website quoted independent economist Mamdouh Al-Wali as saying that “it is likely that the central bank will gradually reduce the pound over the coming period, especially as some international financial institutions believe that the recent devaluation of the national currency will not was able to reduce it to its real market value. “

The website indicated that the Central Bank of Egypt was forced to devalue the Egyptian pound by 14% last March due to the Russo-Ukrainian war, and this decision came a few days after the Federal Reserve raised the interest rate by 0.25% on March 17. has.

It was the first devaluation of the pound since 2016, when the Egyptian monetary authorities were forced to liberalize the value of the national currency to eliminate the then booming parallel foreign exchange market. In both cases, the devaluation of the currency has dramatically reduced the savings of Egyptians and the prices of goods have risen sharply.

In addition, the expected devaluation of the national currency will lead to an increase in the cost of borrowing, as Egypt’s foreign debt rose to $ 145.5 billion at the end of last year, an increase of $ 8.1 billion in the last three months of the year.

External debt is expected to rise further in the coming months as Egypt seeks to meet the basic needs of its growing population, move forward with its development plans and meet its financial obligations to other countries and international financial institutions.

Fears of stagflation

The website added that it is also possible that the central bank will have to raise interest rates to curb inflation and seize foreign liquidity in the local market, as the bank had already raised the key interest rate by 100 basis points in the previous March to curb . inflation and create demand for the national currency.

The website indicated that two state-owned banks at the time issued savings certificates with an interest rate of 18%, which forced the Egyptian money holders to rush to the banks and buy the certificates, and within a month and a half after the certificates has been issued. , the Egyptians paid hundreds of billions of pounds to buy it, which reduced liquidity.In the market, but it also eliminated investments and caused an unprecedented recession, which is reason enough to double the currently high inflation rate, which again ‘ an inflationary recession in the coming period.

The website pointed out that headline inflation accelerated to its highest level in almost 3 years, reaching 8.8% last February and approaching the upper limit of the central bank’s target range, ranging between 5% and 9%. On the other hand, economists point out – according to the website – that it is often inevitable to raise the interest rate for the central bank if it wants to control inflation and reduce liquidity in the local market and focus on production.

foreign capital flight

Economists have said – as quoted by the Middle East Eye – that the recent rise in interest rates by the Federal Reserve is likely to weaken foreign investors’ interest in Egyptian debt instruments, adding that the same move is likely to lead to additional foreign capital flight.

The website stated that the Egyptian economy is also very dependent on imports, as the depreciation of the Egyptian pound has forced the country to pay more for imported goods, and this has exacerbated the difficult situation, as the war in Ukraine is already ‘ an increase in the Egyptian import account, especially for strategic goods Like wheat, Egypt is the largest importer of wheat in the world, as in 2021 it imported almost 80% of its needs from Russia and Ukraine. The high cost of wheat imports and the problems that the war contributes to these imports led the government to turn to the local market, which forced local farmers to supply a portion of the products to the government.

The website indicates that the Egyptian government – in its quest to mitigate the effects of the war and recent international economic developments – has also begun to implement a series of austerity measures, including spending. On April 26, President Abdel Fattah al-Sisi called on his government to hold an international press conference announcing his plan to address these economic developments.

The website goes on to explain that Egypt is mostly acting in accordance with the requirements of the International Monetary Fund, and also plans to list military-owned companies on the stock exchange and encourage the private sector to participate more in economic activities. This comes amid reports that Egypt has applied for a new loan from the International Monetary Fund to mitigate the effects of the war in Ukraine, the Covid-19 virus and repeated interest rate hikes on the economy.

Suffering continues

The website confirms that with the rising rise in food prices, which has continued to rise since last February, consumers will be exposed to increasing pressure at a time when millions are already finding it difficult to run their businesses, fueling public anger. that the rise in wheat prices has encouraged local bakers.To increase the price of bread in front of millions of people who are not registered in the national food supply system, and the prices of other commodities have risen sharply, amid calls to the government for stricter to adjust. market controls, and to prevent traders from exploiting the ongoing economic turmoil to increase their profits.

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