Inflation is considered one of the most important factors affected by economic fluctuations and crises as it affects the monetary authority of the state by reflecting its impact on the increase in the exchange rate of the national currency in the market and the decline in purchasing power. The latter affects the general cost of living and the cost of financing enterprises, and their ability to maintain profits and capital.
The global inflationary pressures began to build after the world economy emerged from the disruptions caused by the COVID-19 pandemic. These pressures became amplified with the recent Russia-Ukraine conflict. Rising basic international commodity prices resulting from further supply chain disruptions in addition to increased risk-off sentiment and rising freight cost have added to domestic inflationary pressures as well as external imbalances.
As the exchange rate of the national currency constitutes one of the most important challenges facing any country in determining or shaping the features of its general economic policy, and despite what the Egyptian currency is witnessing today, the largest decline in 5 years to record 18.21 pounds against the dollar, the Egyptian financial and monetary policy remain flexible enough to control prices.
Recently, the Egyptian economic reform program has improved the efficiency of Egypt's macroeconomic indicators, in an attempt to confront any economic challenges and disruptions and maintain price stability with solid buffers to insulate the economy from excessive volatility.
As a result of the importance of the exchange rate elasticity and flexibility to serve as a tool for facing and managing economic disruptions and maintaining Egypt's competitive economic position, the Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, the overnight lending rate and the rate of the main operation by 100 basis points to 9.25 percent, 10.25 percent, and 9.75 percent, respectively. The discount rate was also raised by 100 basis points to 9.75 percent
The Central Bank also announced the issuance of one-year saving certificates with a rate of return of 18% in governmental banks, namely the National Bank of Egypt and Banque Misr.
Subsequently, the Ministry of Finance has introduced a support package of 130 billion EGP to deal with global economic challenges and mitigate its effects on citizens. This package includes an increase in wages, expanding the category of families eligible for financial aid and benefits, increases in pensions by a minimum of 13%, increases in the tax exemption rate by 25%, fixing the exchange rate for customs for basic commodities and production materials to 16 EGP against the dollar, exempting industry sectors from real estate tax for a period of 3 years, renewing the last tax disputes law, and exempting investment funds from tax, in addition to introducing tax incentives for investors.
To conclude, this article aims to highlight the bold steps undertaken by the Central Bank to resolve the root of the financial hardships. These decisions create a new reality that allows companies to continue to plan and conduct deals because the anticipation of the exchange rate devaluation creates a state of uncertainty in the market, and the combination of exchange rate devaluation, and raising interest rates, will ultimately lead to a revival of interest trade in Egypt and the new support package prepared by the Ministry of Finance will mitigate the effects of financial challenges on citizens.
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