The Central Bank of Egypt (CBE) surprised global and local financial markets on Thursday with a set of bold decisions, to which were added the full liberalization of the exchange rate and the adoption of a flexible exchange rate, increasing the interest rate of 2% immediately and announcing the start of work on the construction of a financial derivatives market.

The CBE explained that the global economy is facing many shocks and challenges that it has not witnessed in years, as global markets have recently been exposed to the spread of the COVID-19 pandemic and policies. closure, followed by the outbreak of the Russian-Ukrainian war, both of which had severe economic repercussions.

Flexible exchange rate

In light of these extraordinary circumstances, these reform measures have been taken to ensure macroeconomic stability and achieve sustainable and comprehensive economic growth, with the CBE stressing that to achieve this, the exchange rate will reflect the value of the EGP per against other foreign currencies. by the forces of supply and demand within a flexible exchange rate system, with price stability as the overriding priority, which will also enable it to work towards building and maintaining sufficient levels of international reserves.

Removal of documentary credits

The EPC has also promised the business community that it will phase out the instructions issued on November 13, 2022, regarding the use of documentary credits in import transactions, noting that they will be completely repealed by December 2022 and that this measure will serve as an incentive to support economic activity in the medium term.

In its first steps to implement this plan, the CBE decided to increase the value of shipments imported with collection documents to $500,000 instead of $5,000 or its equivalent in foreign currency.

Build and develop the financial derivatives market

In addition, the CBE revealed that it will strive to build and develop the financial derivatives market to improve the foreign exchange market and raise foreign currency liquidity.

To this end, the CBE has decided to authorize banks to offer forward foreign exchange contracts to their corporate clients, provided that their purpose is to cover client positions resulting from commercial transactions represented by documentary credits, collection documents, supply facilities or transfers of profits abroad. shareholders for a specific date abroad, or the income from the export of goods and services received by the bank’s customers.

The bank would obtain proof that the transaction is commercial while taking into account that customers are not allowed to engage in such transactions for speculative purposes.

The CBE will also allow banks to carry out forward foreign exchange transactions between themselves locally for non-speculative purposes, in addition to allowing them to carry out exchange rate swaps (FX swaps) for corporate clients, provided that their purpose is to cover customer positions resulting from the above-mentioned commercial operations — which will be carried out through the same bank — emphasizing the possibility of carrying out the same operations only with local banks.

Prohibition of non-deliverable forward foreign exchange transactions

In addition, the EPC lifts the previous ban on banks on non-deliverable forward contracts for clients comprising banks, institutions or individuals, while allowing banks to perform these transactions for corporate clients.

He also stressed that banks should observe credit granting controls, ensuring that they do not offer credit or funding facilities to customers or any foreign currency business unless they have fully ensured themselves. that these customers have sources of payment in foreign currencies and that they undertake to use them in payment.

Base rate increase of 2%

In addition, the CBE has stated that it aims to support the price stability objective over the medium term and its monetary policy committee decided at its extraordinary meeting last Thursday to raise deposit and lending rates to the day-to-day and the price of the main operation of the CBE by 200 basis points to 13.25%, 14.25% and 13.75%, respectively, and the credit and discount rate were increased by same percentage to reach 13.75%.

According to the CBE, the rise in global and local prices should cause the general inflation rate to rise from its target, which is 7% (±2%) on average during the fourth quarter (4Q) of 2022.

For its part, the MPC stressed that the objective of raising interest rates is to contain inflationary pressures caused by demand, the high rate of growth of domestic liquidity, inflationary expectations and the secondary effects of shocks. offer, stressing that it will continue to announce inflation target rates – which began in 2017 – on a consistent basis, with the target being a downward path for inflation rates.

According to the committee, inflation policy has been successful in reducing inflation rates until recent global shocks.

Finally, the CBE underlined that it will closely follow all economic developments and that it will not hesitate to use its monetary tools to achieve price stability.

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