Egypt’s currency plunges 15% after Cairo agrees to key IMF exchange rate condition

After Egyptian authorities announced the adoption of a more flexible exchange rate regime, the pound’s exchange rate against the US dollar plunged to 23.09, a new low for the currency. Cairo’s apparent devaluation of the Egyptian pound was a key condition set by the International Monetary Fund (IMF) before it finally approved a $3 billion rescue package for Egypt.

The IMF’s key condition

According to a report, the official exchange rate of the Egyptian pound against the U.S. dollar plunged 15% to 23.09 per dollar after the central bank announced a more flexible exchange rate regime. Cairo’s apparent devaluation of the currency came amid news that Egypt had reached an agreement with the International Monetary Fund (IMF) that will see it receive a $3 billion bailout.

Before the latest decline in the pound, the currency was trading at just under 20 units per dollar. Some Egyptian banks, as well as the IMF, have argued that the exchange rate, which was last adjusted in March, overvalued the currency. Before that, the pound/dollar exchange rate had remained unchanged for about two years.

Egypt’s chances of getting a bailout from the international financial institution depended on abandoning the fixed exchange rate regime. As noted in the report, the IMF had similarly demanded the devaluation of the Egyptian pound before finally approving a $12 billion loan package in 2016.

Support from Egypt’s allies in the Gulf Cooperation Council

In addition to the agreement on the $3 billion loan package, Egypt is expected to get $5 billion from the “international partners“. According to a Reuters article citing unnamed government officials, the additional funds are intended to help Egypt fill its external financing gaps. Egypt has also requested $1 billion from the IMF’s newly created sustainability fund.

Although Egypt’s latest loan agreement with the IMF fell short of expectations, an analyst at London-based Columbia Threadneedle Investments, Gordon Bowers, said it likely paved the way for the country’s wealthy allies to step in. He stated:

It appears that the additional GCC [Gulf Cooperation Council] was contingent on IMF participation. This is a positive point.

Reports suggest that Egypt’s GCC allies have pledged more than $20 billion in aid, which is expected to arrive in the form of deposits and investments.