As Egypt still seeks a way out of its grinding foreign currency crunch, Oxford Economics has predicted that the value of local currency will drop somewhere between 55/$ and 60/$ by the end of the year if regulators switch to a flexible exchange rate regime.  

The Oxford-based think tank noted that such depreciation might help close the widening gap with the black market, where the exchange rate topped 70/$ last week before moving down to nearly 58/$ on Sunday. The official exchange rate still stands at 30.9 against the green back.

Based on its forecasted exchange rate, Oxford Economics expects the annual inflation to peak in Q4 2024, reaching between 40% and 45%. Headline inflation has been slowing down in recent months, reaching 33.7% in December compared to 38% in September.

London-based think tank, Capital Economics released a more pessimistic forecast last week, predicting the Egyptian pound to experience “an initial fall” to 60-65/$ if regulators embark on a devaluation soon. 

For almost a year, the Central Bank of Egypt (CBE) has maintained the same official rate below 31/$, ignoring calls by the IMF to adopt a flexible exchange rate. The IMF considers the devaluation of the pound essential to attract foreign capital inflows and reduce a widening financing gap.

On Thursday, an IMF team concluded a two-week visit to Egypt aimed at reaching an agreement before conducting the long-overdue first and second reviews of Egypt’s economy under the framework of a $3-billion loan program. Ivanna Vladkova Hollar, the IMF Mission Chief for Egypt, stated that her team and Egyptian officials had made “excellent progress” on key issues and added that additional support from the IMF and other bilateral and multilateral partners is being explored.

The renewed talks with the IMF have been widely seen as a potential prelude to the adoption of more orthodox policies, particularly a flotation of the local currency. On Thursday, the CBE announced a surprising two-percent interest rate hike, raising overnight deposit and lending rates to 21.25% and 22.25% respectively.

"Given Egypt has tightened fiscal policy with price hikes and an announced 15% cut to investment spending this year, all eyes are on what happens to the pound," Capital Economics said.

(Reporting by Noha El Hennawy; editing by Seban Scaria)