GCC allies pledge support for Egyptian economy as it struggles from surging food prices in the fallout of the Russia-Ukraine war
The devaluation will trigger upward inflationary pressures, with many retailers already marking up their prices, and FrontierView forecasts that this will average 10.5% in 2022. This increased inflation will have a contractionary effect on consumer spending, with lower- and middle-income consumers seeing their purchasing power shrink. B2Cs that address price-sensitive consumer segments should enhance their marketing campaigns and emphasize their value proposition to preserve their sales. The issuance of 18% savings certificates by the two largest national banks has been well received by higher-income segments, and this may cause a slowdown in big-ticket purchases as consumers lock up their cash for the coming year.
In an exceptional meeting on March 21, the Central Bank of Egypt (CBE) raised its lending rate by 1% to 10.25% and stopped its support of the Egyptian pound. In the days after this decision, the Egyptian pound declined from 15.7 to the dollar to 18.5 to the dollar, before recovering to 18.2. The UAE, Saudi Arabia, and Qatar have since pledged a combined US$ 12 billion to support the Egyptian economy as it struggles from surging food prices in the fallout of the Russia-Ukraine war.
The Russia-Ukraine war created spikes in grain and fuel prices that have severely strained Egypt’s finances. Egypt gets around 50% of its wheat from Russia and Ukraine, and the war between the two countries is expected to raise Egypt’s import bill by around US$ 1 billion. However, rising commodity prices and interest rates worldwide have gradually pressured Egypt’s finances since the end of 2021, and the recent US Federal Reserve interest rate hike has pressured portfolio investment in Egypt. By devaluing the pound, Egypt seeks to boost the competitiveness of its exports and better position itself for new financing from the IMF; additionally, it seeks to avoid expending valuable resources on supporting the currency like it did in the run-up to the 2016 devaluation. These measures, in addition to financial support from GCC allies, should see Egypt maintain investor confidence; accordingly, we expect that the Egyptian pound will average 17.9 to the US dollar in 2022.
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