Figure 1: Selected emerging market exchange rates, percentage change against the US dollar: June 2021 compared to June 2023

Extract A: Can Egypt's central bank stabilize the pound?

At an annual rate of 35.7%, Egypt's inflation is exceptionally high, driven heavily by global commodity shocks and structural import dependence. This represents a severe crisis for the economy, whose currency (the Egyptian pound) lost approximately 55% of its value against the US dollar over the two-year period ending June 2023. The Central Bank of Egypt (CBE) faces intense pressure; while higher interest rates are needed to curb capital flight and support the pound, raising rates threatens to stifle domestic business investment and increase the government's own borrowing costs. Egypt's public sector holds massive external debt, a significant portion of which is denominated in foreign currencies, particularly US dollars. Consequently, the government and the CBE are highly sensitive to sharp currency depreciations that increase the local currency cost of servicing these foreign debts and undermine financial sector stability.

Skyrocketing consumer prices, particularly for essential foodstuffs like wheat, have placed immense strain on households. Some economists argue that further currency depreciation will trigger a wage-price spiral, while others emphasize that raising interest rates will worsen Egypt's fiscal deficit. Over the longer term, structural challenges—including a persistent trade deficit and bureaucracy—weigh on Egypt's growth potential. Between 2023 and 2040, Egypt's GDP growth is projected to average 3.0% annually, failing to keep pace with the job creation needed for its rapidly growing population.

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