Egypt’s central bank floated the pound currency yesterday, devaluing it by almost a third against the dollar in an initial move hailed by bankers and the IMF as a big step towards balancing its markets and attracting investment.
The pound had been pegged at 8.8 to the dollar since March but a shortage of dollars in the economy has kept the currency under intense downward pressure in recent months.
Egypt has struggled to attract dollars since a 2011 uprising that drove away tourists and foreign investors. That has forced the central bank to ration supplies of hard currency and impose strict capital controls, hampering trade in a country that relies on imports of everything from cars to food.
A slump on the black market to 18 pounds per dollar earlier this week prompted importers to stop buying greenbacks.
But the black market rate had strengthened to 13 against the dollar by late on Wednesday, creating a rare opportunity for the central bank to devalue its official rate to the new black market level, a drop of more than 32 percent. In a shock announcement early yesterday, the central bank said it had gone further than bankers expected, to freely float the Egyptian pound. It simultaneously hiked benchmark interest rates by 300 basis points to buoy the currency.
“The Central Bank of Egypt hereby announces its decision to move, with immediate effect, to a liberalised exchange rate regime in order to quell any distortions in the domestic foreign currency market,” it said in a statement.
“This move will allow market demand and supply dynamics to work effectively in order to create an environment of reliable and sustainable provision of foreign currency.”
With a budget deficit of 12 per cent in the 2015-2016 fiscal year and currency markets facing severe distortions, Egypt reached a preliminary deal with the International Monetary Fund in August for a $12 billion three-year loan to support an economic reform programme.
As part of those reforms, Egypt was widely expected to devalue the pound and ditch its currency peg to the dollar for a more flexible exchange rate mechanism, a move economists say could unlock billions of dollars in foreign investment.
The International Monetary Fund welcomed the move.
“This will make more foreign exchange available. The flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment,” IMF mission chief for Egypt, Chris Jarvis, said.
Egypt’s dollar bonds rallied two per cent across the curve after the flotation. Egypt’s stock index surged 8.3 per cent on the news with many stocks rising to their 10 per cent daily limits.
Hisham Ezz al-Arab, the chairman Egypt’s largest listed bank CIB, called the move “historic”, saying it marked a shift in mindset that would restore investor confidence.
“For the last tens of years we are talking about the exchange rate as a target as an objective. It’s the first time ever we talk about the exchange rate as a tool,” he said.