On April 7, the exchange rate of the US dollar (USD) to the Egyptian pound (EGP) saw a significant jump, with the selling price reaching 51.46 EGP/USD and the buying price at 51.3 EGP/USD, according to data from the Central Bank of Egypt (CBE). This marked a notable 1.6% increase, up from 50.6 EGP/USD recorded on April 3, reflecting a gain of 0.86 EGP.
However, the following days saw a slight dip in the exchange rate. By April 9, the dollar’s value eased slightly, with the selling price at 51.3 EGP/USD and the buying price dipping to 51.19 EGP/USD.
Impact of tariffs
This currency fluctuation followed President Donald Trump’s April 2 announcement imposing a 10% base tariff, with potential increases reaching 104% on China, and 46% and 50% on countries like Vietnam and Lesotho, respectively, impacting all countries trading with the US, including Egypt, according to a White House fact sheet.
According to the White House, the tariffs are set to take effect on April 5 for countries subject to a 10% tariff, and on April 9 for those facing higher reciprocal tariffs.
In an interview with Business Monthly, Medhat Nafei, Chairman of Arab Alloys and Advisor to the Prime Minister, offered his perspective. He explained that the capital flow, the movement of money across international borders for investment purposes, had been affected by selling pressure on loan instruments, a response to the financial uncertainty caused by Trump’s policies. Nafei remarked, “Investment portfolios globally have incurred significant losses, and even in the US, loan instruments are being sold in high volumes.”
He further noted that this “dumping” of portfolio assets into loan instruments likely contributed to an outflow of USD from Egypt. Nafei added that the depreciation of the Egyptian pound against the dollar could, however, boost investment in USD-denominated assets in Egypt: “The devaluation of the pound encourages the appreciation of USD investments in Egypt, potentially enticing investors to enter the market or at least stay invested.”
As reported by the Central Bank of Egypt (CBE), net Foreign Direct Investment (FDI) inflows reached an impressive $46.064 billion in FY 2023/2024, a significant increase from $10.038 billion in FY 2022/2023.
CBE’s monetary policy
Nafei explained that the Central Bank of Egypt (CBE) is currently implementing monetary policies aimed at reducing interest rates. However, he cautioned that if the CBE begins to ease these policies, particularly with a significant decline in inflation, it could face challenges in maintaining the attractiveness of loan instruments denominated in Egyptian pounds (EGP). To counter this, the CBE may need to increase the value of the US dollar to encourage USD inflows, Nafei noted.
Currently, the CBE’s interest rates are high, with the overnight deposit rate set at 27.25% and the overnight lending rate at 28.25%. This high interest rate environment has been implemented to control inflation, but Nafei pointed out that the uncertainty surrounding the exchange rate has significantly increased, making the market unpredictable.
Given this uncertainty, Nafei highlighted that the CBE is hesitant to make any substantial cuts to interest rates for fear that such actions could lead to an outflow of investments. He suggested that any rate adjustments would likely be gradual, predicting that rates could decrease cautiously by 200 to 300 basis points in the upcoming monetary policy review. This would help close the gap between inflation and interest rates, allowing the CBE to avoid overly aggressive monetary policies.
Global reserve currency
Nafei addressed the complexities surrounding the US dollar, stating, “The issue with the USD lies in its status as the global reserve currency, which causes its movements to deviate from traditional trade flow dynamics.” He further explained, “Normally, the flow of trade alone is enough to determine a currency’s value relative to others. However, because the USD is the global reserve currency, its value can quickly rebound due to heightened demand for it as a reserve asset, even when typical trade patterns would suggest a different outcome.”
Rising reserves
In a related development, the CBE announced that Egypt’s international reserves had risen to $47.757 billion by the end of March, up from $47.393 billion at the end of February, marking a $364 million rise.
