Higher interest rates make it more attractive to hold assets in the currency in question. The Egyptian pound was a notable exception to that rule last week. The country's central bank recently raised interest rates from 21.25 per cent to 27.25 per cent. Yet the pound came under solid pressure immediately after that decision. The currency lost almost 40 per cent of its value within a day. This was entirely due to the decision to largely abandon the pound's fixed exchange rate. Among the public, this move hurt quite a lot, as imported goods became considerably more expensive overnight. In the long run, however, the National Bank of Egypt's choice may well work out well.
Billions back to homeland
Firstly, an important hurdle has been removed for Egyptian migrants to transfer money to their home countries. Due to the artificially high exchange rate, more and more Egyptians in other countries were choosing to channel their earnings back through the black market. In the second quarter of 2022, guest workers made remittances equivalent to €8.25 billion. Over the course of last year, that fell to just over €4bn per quarter. The devaluation of the pound will make it a lot more attractive for Egyptians abroad to channel money back to family members left behind. The tourism industry is also getting a big boost thanks to the lower exchange rate.
Beautiful weather and ancient wonders
In the first 50 days of 2024, the country received 6 per cent more tourists than a year earlier. In view of the geopolitical tension and conflict in Gaza, this is a big boost. But the increase compares poorly with the 25 to 30 per cent tourism growth the country is targeting. Apart from the approximately 4,000-year-old pyramids and a wealth of other historical treasures, Egypt also has the climate to thank for it. In the main tourist coastal resorts, the average May temperature is around 30 degrees. A substantially devalued pound also makes it a lot more attractive to travel to the country from a financial point of view. Finally, Egypt is also gaining hands at the IMF for its interest rate hike and especially for allowing more freedom in the exchange rate.
Tough measures with a golden edge
The organisation released an additional $5bn loan package in response. Combined with the funds Egypt is receiving from Middle Eastern lenders, this puts somewhat of a floor under the economy. Therefore, the sharp downturn is not necessarily the start of a new slide. If inflation comes under control thanks to the interest rate hike and foreign currency inflows increase thanks to booming tourism and a higher influx of foreign workers, the Bank of Egypt's tough measures may even give the economy a substantial boost. For sun-lovers, at least, it will be nice to see a holiday in the country become a bit more affordable.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
