It’s morning again in Egypt — we mean that literally, but also figuratively, in the same way that (forgive us the analogy) Ronald Reagan’s campaign team meant it with its famous 1984 campaign ad. Simply put:

Yesterday’s bold policy moves and clear statements by officials leave us more optimistic about the economy’s direction of travel than we have been in four very long years. Remember the “Dragon Storm” that portended the start of covid-19 and, with it, the crisis from which we now seem to be emerging? The four-year anniversary is in just five days’ time.

Central Bank Governor Hassan Abdalla spoke for us all when he said yesterday that having two exchange rates is a “disease that throws things out of balance” and that much of what we’ve seen in the past four years has reflected a “lack of confidence” in the EGP (watch, runtime 12:27).

Yesterday’s moves were exactly what the doctor ordered, suggesting policymakers are serious about restoring confidence. We have avoided the scenario many had feared: That the Ras El Hekma investment would provide short-term cover for policy inaction.

It is too early for unbridled optimism, but after a long period of slumber, we took explosive steps out of the starting blocks yesterday. The big challenge for all of us now — whether we’re leading companies or governments — is to deliver policy stability while remaining flexible in the face of outside shocks.

But you know what? It’s okay to feel good this morning.

^^ We have the full rundown on everything in this morning’s news well, below.

BUT FIRST- Here’s the recap of what went down and how many in our community are feeling now:

#1- The Central Bank of Egypt’s decision to allow the EGP to float was the key that unlocked it all. And if it (so far) feels real, that’s because it is, senior bankers, government officials, and diplomats tell us. After a period of bid-and-ask price discovery throughout the morning yesterday, banks bought and sold real volumes on the interbank market in the afternoon.

#2- A jumbo-sized, 600 bps interest rate hike and the rollout of new, high-interest CDs to sop up liquidity are probably just what the doctor ordered. A senior Finance Ministry official tells us that a 30% or higher return on t-bills is squarely in the range that they’ve been told by foreign institutions would bring them back. The CEO at one of the nation’s most visible private-sector banks tells us they bought USD from investors outside Egypt yesterday.

The key now: How quickly can we move to a series of rate cuts that will bring borrowing costs under control for the government and corporates alike.

WATCH THIS SPACE- The central bank will sell EGP 110 bn worth of t-bills between today and Sunday.

#3- The IMF handed us a lifeline that could be worth as much as USD 9.2 bn, including USD 8 bn in an extended fund facility covered under the staff-level agreement inked yesterday and, possibly, another USD 1-1.2 bn in climate finance from the lender — talks on the latter are still in progress.

More important are the policy reforms for which we’ve signed up as a condition of the agreement, which brings us to:

#4- The IMF is going to be watching closely to make sure we stay the course, saying it will be monitoring our “move to a flexible exchange rate system, tightening of monetary and fiscal policies, and a slowdown in infrastructure spending” all with a view to “reducing inflation, and preserve debt sustainability, while fostering an environment that enables private sector activity.” We hope they’re vocal and public if they see signs of deviation.

#5- There are very clear statements from officials including Prime Minister Moustafa Madbouly, Abdalla, and Finance Minister Mohamed Maait that officials know we went off-track — and that we’re committed to setting things right. The drumbeat will continue today: Maait has briefed G7 ambassadors and sought their support and will appear this afternoon at the American Chamber of Commerce in Egypt. He’s also planning to make the rounds of other business associations and international chambers to talk about where we go from here.

#6- Importers of essential goods are getting allocations that are allowing them to move goods out of ports. Food and medicine are at the top of the list, we’re told, but the hope is that folks with production inputs in port are next. The emphasis at one of the nation’s largest banks, we’re told, will be to “allocate as much as possible to as many clients as possible to make it clear: There’s money moving into the system.”

#7- Credit card restrictions are easing after the central bank left it to each lender’s discretion how fast they let go of controls imposed over the past four years of crisis.

#8- Foreign appetite for Egypt is starting to return. Investors in the UAE yesterday had more appetite for the Egypt story than at any time in the past four years. True, that’s not a high bar, but the interest was palpable. And our friends at multiple banks and investment banks are getting calls from investors in London, New York, and Frankfurt asking questions as they plan strategy.

But we need to be realistic: We need an extended period of policy stability if we’re going to lure back foreign capital and have it stick — whether you’re talking foreign portfolio investment, FDI, the carry trade, or interest in our debt.

#9- We’re going to be able to access debt markets again, and that’s a good thing. Sentiment among the pundits is that we are now in a much better position to meet our short-term debt obligations — nail that and we can access the eurobond market again, making it much easier for Maait and his team to effectively manage our debt.

#10- As one of the smartest people we know said yesterday: “Don’t be shocked if you see a bit of dollarization before we de-dollarize.” After a prolonged period of scarcity, some will cling to (or try to accumulate) USD in the days ahead and only let them go when the new FX policy proves credible.

#11- Expect several weeks of volatility. We’re all adjusting to a new reality, and the coming days won’t be a simple, linear journey. The key is for policymakers to stay the course and for business leaders to be level-headed as we push through the days to come. Small hiccups in the coming days don’t necessarily suggest we’re deviating off course, though they bear watching.

#12- And because it’s all about sentiment, you can expect a steady drip of announcements from banks and the government as restrictions ease and hard currency is made available. The goal: To convince holders of USD (particularly tourism and hotel operators) that it’s safe to de-dollarize while sending the right signals to consumers and foreign investors alike.

#13- Will things get more expensive? We expect fuel price hikes and other subsidy cuts to have a transient impact on prices, but remember: The EGP is now changing hands at just under 50 to the greenback. Most goods on shelves now were priced at an implied exchange rate of something around EGP 70. As both EFG Hermes’ Mohamed Abu Basha and HSBC’s Simon Williams have noted — prices should cool.

We need to make sure that we learn the right lessons. Those lessons are many, but we can boil them down to four:

  • The policy goal is not the exchange rate, it is to see broad-based economic growth led by the private sector with an inflation-targeting monetary policy regime that uses multiple tools to sustainable growth. A flexible exchange rate is a shock absorber — a peg is a boat anchor.
  • We absolutely need infrastructure after nearly three decades of significant underinvestment in the run-up to 2011 — but it needs to be paced out.
  • The private sector absolutely cannot let up on the idea of exporting at the same time as we cater to domestic demand. Tourism, manufacturing, services — they’re all key. Private-sector-led growth is the only way forward.

Covid, the war in Ukraine, and genocide in Gaza have all presented external shocks, but they’re shocks that other countries have absorbed. Many emerging and frontier markets let their currencies slide to remain globally competitive as covid unfolded. We did not. We didn’t adjust after the war in Ukraine prompted capital flight from our market and many others. And we’ve sagged under fallout (cf: Suez Canal receipts, broad sentiment) from Israel’s brutal war in Gaza.

The hope now? “When you do the right thing, when the signals to the market are encouraging, you set up a virtuous cycle,” says Abu Basha. “You attract foreign inflows in addition to the IMF program. You’ll see a boost in reserves. And, critically, you’ll start seeing USD already in Egypt flowing into the official market. The right policy moves create confidence that, with high rates, brings in foreigners and gives locals confidence.”

Exchange rate policy should be a shock absorber, not a boat anchor.

PSA-Ramadan hours kick in next week: Shops, malls, restaurants, and cafes will be allowed to stay open until 2 am during the month of Ramadan and the Eid Al Fitr holiday, according to a Local Development Ministry decision published in the Official Gazette. The extended hours will come into effect on Sunday.

Meanwhile, at government offices: Public sector employees will be heading to work from 9 am to 2 pm during the holy month, according to a cabinet statement.

Banks will follow suit: The central bank will soon share banks’ working hours for the month.

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