In preparation for the issuance of the new "pound index", the Central Bank of Egypt announced that it will adopt a flexible rate system to exchange the value of the pound against foreign currencies, based on the mechanism of supply and demand in the market.

In an exceptional meeting held today, Thursday, the Central Bank of Egypt announced, in a surprising decision, an increase in key interest rates by 200 basis points during the Monetary Policy Committee’s meeting, coinciding with the country’s announcement that it had reached an expert-level agreement with the International Monetary Fund.

The price of the dollar crossed the barrier of 23 against the Egyptian pound - for the first time ever - and the prices of the non-deliverable Egyptian currency futures contracts for 3 months rose above 25 pounds.

The Central Bank of Egypt justified the decision by saying that "the global economy has faced many shocks and challenges that it has not witnessed for years," referring to "the repercussions of the Corona pandemic, and the Russian-Ukrainian war, which caused pressure on the Egyptian economy, as it faced an exit from the capital of foreign investors, as well as about an increase in commodity prices.

What does "flexible exchange policy" mean?

The Central Bank's talk about adopting a "flexible exchange policy" comes within the reform measures that it says are necessary, to ensure macroeconomic stability and achieve sustainable economic growth.

According to the Central Bank, the flexible exchange rate system will reflect the value of the Egyptian pound against other foreign currencies through supply and demand, with priority given to the central bank's primary goal of achieving price stability.

For the first time, the Central Bank of Egypt seeks to launch a special index for the local currency to evaluate the performance of the pound against a basket of foreign currencies and gold, after it lost more than 45% of its value against the US dollar since last March.

Several questions were raised about the feasibility of issuing an index for the Egyptian pound and avoiding the path of the US dollar, which rose to a record against other foreign currencies after the US Federal Reserve adopted a strict monetary policy to counter high inflation rates.

This trend, which was revealed by the Governor of the Central Bank, Hassan Abdullah, during the economic conference in 2022 - which was held in Cairo from Sunday to last Tuesday - comes with the Egyptian government's tendency to adopt great flexibility in the exchange rate of the pound in response to the demands of the International Monetary Fund in order to reach an agreement. Final agreement on a new financial financing package.

During his speech within the activities of the economic conference on Sunday, the governor said, "America is not the main trading partner for Egypt until the Egyptian pound is linked to the dollar, and that is why we moved towards creating an indicator for the Egyptian pound," adding, "We are not an oil-exporting country, so the culture of linking the local currency to the dollar must be changed." .

Despite the pound's decline against the dollar at a record level, Abdullah spoke about the rise of the Egyptian pound against other currencies such as the euro and the pound sterling.

The idea of ​​the index was based on the perception that the dollar does not reflect the real value of the Egyptian pound compared to other currencies.

In turn, Forbes Middle East magazine refuted the performance of the pound against the major currencies, and indicated that it declined against 5 major currencies, namely the US dollar, the Swiss franc, the Chinese yuan, the euro and the British pound since the end of 2021, and until October 24, with the exception of the Japanese yen, which rose In front of him is 3.5%.

The Egyptian pound fell against 5 currencies this year, which are the dollar, the franc, the yuan, the euro and the pound, while it rose against the Japanese yen, but the central bank plans to create a currency index.. Will it save the pound?

These are the opinions of experts.#Forbes

🔗 https://t.co/in4qMGjtky pic.twitter.com/qJovewEuB9

— Forbes Middle East (@ForbesME) October 25, 2022

A popular idea awaits a clear mechanism

The intention to launch the index, although it was very popular among government officials, the central governor did not go into more details about the mechanism of the index's work, which attracted the attention of many analysts and economists.

In addition to working on issuing the Egyptian pound index, the Central Bank of Egypt is working on hedging contracts against the risks that the pound is exposed to after it fell to a record level, and the CBE governor explained that the future contracts had been completed.

Speaking earlier at the same conference, Prime Minister Mostafa Madbouly targeted this perception, saying: "We have the impression, as Egyptians, that the currency rate is linked to the strength of the economy."

The prime minister stressed that the priority is to curb inflation and the price of goods, not the pound exchange rate, he said.

Madbouly defended the pound's decline, suggesting that a weaker currency might be more useful sometimes.

He said that "countries sometimes plan" such a move to boost the economy, exports and attract investment.

Is the pound freed from the domination of the dollar?

The new index, after adopting a flexible exchange rate, aims to reduce the impact of the Egyptian pound's exchange rate on the developments of the US dollar, and the continued decline of the local currency to record levels after exceeding the barrier of 23 pounds to the dollar.

Expectations had indicated a greater devaluation of the Egyptian pound between 10% and 14% during the coming period, if not to re-liberate the exchange rate in a step similar to what happened at the end of 2016.

The Egyptian government believes, according to Madbouly, that the development of an index measuring the value of the Egyptian pound will reflect its true value.

An indicator for a fair valuation of the pound

Banking expert Sahar El-Damaty, former Vice President of Banque Misr, said, “In light of the central governor’s speech, there is no need to link the Egyptian pound to the dollar like oil-exporting countries, and it should be linked to a basket of foreign currencies and gold, and therefore people only see the dollar, and this does not represent the true value of the pound.” And in order for there to be a balance in the evaluation of the currency, the currency must be looked at compared to other foreign currencies, not just the dollar.

Regarding the feasibility of issuing the index, she explained to "Al-Jazeera Net", that so far the publication of the index has not been issued by the Central Bank in order to know how the index is performing and using it, considering that it has nothing to do with the liberation from the dominance of the dollar.

Sahar El-Damaty considered that the index aims to determine a fair value of the Egyptian pound against a basket of foreign currencies, not just the dollar;

Because all the evaluations of the pound for decades depended on the dollar as the main and only currency to evaluate the pound, and it denied that it was intended as a mere psychological step.

Forward escape?

On the other hand, economic expert Ibrahim Nawar believes that launching such an indicator has no point behind it but fleeing forward, and he said: "Unfortunately, the words of Hassan Abdullah (Central Bank Governor) are not responsible and are never issued by a central bank governor anywhere in the world. ", As he says.

He continued, in statements to "Al-Jazeera Net", that the condition for finding this indicator is that the country has a strong export base, liquidity in foreign currencies, a developed financial market, international confidence, strong foreign currency reserves, and stability in monetary policies and legislation.

Nawar added that these conditions "are not available for the Egyptian pound, and what the central governor said will complicate Egypt's negotiations with the International Monetary Fund, and will create a state of panic in the exchange market and in foreign trade and will lead to a devaluation of the pound and an increase in prices."

Forecasts for the liberation of the exchange rate of the pound

While the economist Hani Genena believes, in televised statements, that the new indicator is necessary, but it will not solve a crisis, except that it will give a message about the fair value of the pound, expressing his expectation to liberalize the exchange rate of the pound against the dollar, as the exchange rate of currencies against the pound will be determined according to of supply, demand, and abundance.

Pending the final approval of the International Monetary Fund agreement, Cairo took the initiative to allow greater flexibility in the exchange rate of the pound, and then it will issue the new index, as Egypt is the second largest country in the world after Argentina, which owes the Fund $17.7 billion and holds 12.5% ​​of the total global debt of the IMF. amounting to $142 billion.

Over the course of 2020 and 2021, the Central Bank of Egypt, headed by its former governor, Tarek Amer, restored the policy of stabilizing the exchange rate of the pound, and raising its value by 15% against the dollar;

To become around 15.7 pounds instead of about 18 pounds.