Egypt learns how not to float a currency from Nigeria’s mistakes

It was hardly a surprise when Egypt devalued its currency on Wednesday after over a year of a flawed peg to the dollar that drained liquidity in the foreign exchange market and caused the official and unofficial exchange rates to fly apart.

Devaluation bets had swirled around Egypt for months as analysts grew bolder in their predictions that the Egyptian pound would be devalued for the fourth time in two years.

They were emboldened by the worsening scarcity of dollars in the economy and the lack of investor confidence in the monetary policy regime.

UK-based HSBC bank had in December 2023 projected a devaluation of the Egyptian pound by 40 percent in the first quarter of this year.

That prediction has turned out to be the most accurate after the Central Bank of Egypt (CBE) finally bit the bullet and devalued the currency by 38 percent to 50 EGP per US dollar from 30.8 EGP. The CBE said it will allow the currency trade freely against the dollar from hereon.

While the devaluation was widely expected, it was the action that preceded it that caught many off guard and may prove the difference in whether Cairo’s latest devaluation pays off.

In an unscheduled meeting on the same day the currency was devalued, the CBE hiked interest rates by a record 600 basis points in one fell swoop, its biggest rate hike yet.

Analysts and investors say the central bank was laying the groundwork for a successful currency float by first raising interest rates by a record before devaluing the pound.

This was done in realisation of the fact that devaluing the currency may not be sufficient to lure dollars into the economy if interest rates were not raised to make local debt attractive to foreign investors.