According to the National Bank of Kuwait (NBK), the Central Bank of Egypt is anticipated to start the monetary easing cycle in September 2024 and reduce interest rates by a total of 400 basis points (bps) by this year’s end.
The bank stated in its quarterly economy report on Egypt that the rate cut is expected given that inflation continues to decline through 2024. Since real interest rates have started to rise for the first time since January 2022, inflation has slowed down over the past few months, having reached a high of 27.5% in June.
In addition, the average yield on one-year Treasury bills has decreased by 2% since March 2024 to 26%, indicating that markets are anticipating a 1%-2%rate cut in the upcoming period, according to the report.
The central bank has maintained rates at 27.75% on the discount rate throughout Q2 (April to June) FY 2023-2024.
The government’s FX reserves reached an all-time high of USD 46.3 billion as of June 2024 when it received the final tranche of the USD 14 billion Ras El Hekma investment deal from the UAE in May. Additionally, USD 11 billion in UAE deposits were converted into EGP.
“We see scope for sovereign credit rating upgrades on the back of a sustained flexible exchange rate regime, banking system net foreign assets moving back to positive territory, and post-election political stability,” the National Bank of Kuwait said.
The report stated that Egypt is emerging from its crisis stage as a result of crucial one-off policy moves and deals, such as currency devaluation and mega-investment from the UAE, even though it acknowledged that “major economic challenges still lie ahead. The National Bank of Kuwait said that going forward, markets, investors, and rating agencies will be focusing on the government starting the second phase of the reform process.
Meanwhile, the country is raising fuel prices for the second time in four months, fulfilling an economic reform condition set by the International Monetary Fund (IMF) to unlock hundreds of millions in new loans.
Egypt’s official gazette reported an up to 15% price hike for petrol, four days before the IMF is to review its USD 8 billion loan programme, the next tranche of which is USD 820 million. The new prices were made effective on July 26, according to Egypt’s Ministry of Petroleum and Mineral Resources. Petrol prices jumped about 15% and will now range from 12.25-15 pounds (USD 0.25-0.31) per litre.
The decision will also make diesel, one of Egypt’s most commonly used fuels, costlier, taking its price from 10 Egyptian pounds (USD 0.21) to 11.50 pounds (USD 0.24). As part of its IMF bailout deal, Egypt agreed to gradually slash fuel subsidies, which take up a chunk of its cash-strapped budget.
Egypt introduced an initial round of price hikes in March 2024 to bring domestic prices somewhat in line with those in international markets. It aims to fully remove fuel subsidies by the 2025 end, according to government spokesperson Mohamed el-Homossan.
Egypt has been battling its worst economic crisis in over a decade, with ballooning foreign debt driving up inflation and causing several consecutive devaluations of the local currency. Inflation peaked at nearly 40% in 2023, before narrowing to 27.5% in June 2024. Nearly 30% of Egyptians live in poverty, according to official figures.
Alongside the economic crisis, Egypt has also been caught in regional tensions, with armed conflicts raging in neighbouring Gaza and Sudan. Attacks by Yemen’s Iran-aligned Houthis on shipping around the crucial Red Sea shipping lane have also hit revenues from Egypt’s Suez Canal, recording a 23.4% drop in the 2023-24 fiscal year compared with the previous one.
The IMF has demanded Egypt implement wide-ranging reforms to reset its economy, including shifting to a liberal exchange regime, reducing government spending and incentivising private investment.