Two exchange rates is a “disease that throws things out of balance,” says CBE’s Abdalla

Having two exchange rates is akin to a “disease that throws things out of balance,” said Central Bank of Egypt (CBE) Governor Hassan Abdalla at a press conference yesterday evening (watch,runtime: 51:54) following the bank’s decisions to raise interest rates and float the EGP. The CBE also issued a statement (pdf) after the press conference.

A parallel market exchange rate before yesterday’s moves was the result of “a lack of confidence in the EGP or the management of cashflows,” as well as a lack of confidence in what the path forward looked like, Abdalla said.

While inflation is now on a downward trajectory, Abdalla said, it is expected to exceed the CBE’s targets of 7% (± 2%) by 4Q 2024, according to the CBE statement.The CBE will announce a new target soon, and will not hesitate to use any tools in its arsenal to reach single-digit inflation in the medium term, Abdalla said at the IMF presser yesterday.

Yesterday’s moves are just the first steps: Reaching single-digit inflation rates isn’t going to happen overnight, Abdalla noted, stressing that yesterday’s interest rate hike and the decision to float the EGP are just the first steps. The rest of the path forward “will need work, not just from the central bank, but on the real economy,” he said.

Critically: “We’re not targeting an FX price, we’re targeting inflation,”Abdalla said at the presser. Moving away from an economic policy centered on the exchange rate and towards “a full-fledged inflation targeting policy” is critical for a sustainable long-term view on the economy, IMF Executive Director Mahmoud Mohieldin said earlier this week.

Can the CBE intervene in the market? The CBE will keep its finger off the scale and allow market dynamics to determine FX rates but — like any central bank — it can intervene at any point by making liquidity available in the interbank market “if we see any abnormal fluctuations in the exchange rate, and now we have the resources to do so when needed,” Abdalla added.

For the record: The CBE didn’t intervene in the market yesterday, Abdalla said. “There were media reports that the central bank intervened by injecting liquidity into the interbank system, but we didn’t need to intervene. I can say proudly that all the resources that came in, came from the market,” he said.

The price of credit default swap contracts — which essentially reflect the cost of insuring Egypt’s debt — have plummeted to 2% from 27% annually, signaling renewed investor confidence in Egypt. Meanwhile, the cost of insuring our debt is now at 6% — cooling down from 25% earlier, Abdalla added. As a result, the foreign debt market is now accessible should we need it.

The central bank has enough FX reserves to cover its debt obligations and maintain a surplus, Abdalla also said. It seems that ministries have already got the memo, with an unnamed government source telling Al Borsa in a report published late last night that the Oil Ministry will pay USD 1-1.5 bn in arrears to international oil companies over the coming period.

Businesses can sign forward contracts that enable them to lock an exchange rate for a certain period of time to hedge against any potential fluctuations in exchange rates. These contracts are already available in most of the Egyptian banks, Abdalla said.