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Cairo / AFP
Egypt floated the country’s pound on Thursday as part of a raft of reforms, after a dollar crunch and exorbitant black market trade threatened to grind some imports to a halt.
The government of President Abdel Fattah El Sisi is rolling out an austerity programme and seeking billions in support from abroad in order to meet conditions for a $12 billion loan from the International Monetary Fund (IMF).
Floating the pound had long been among a list of measures demanded by investors and international creditors. Thursday’s central bank decision came as a surprise, after officials said they would only consider floating the pound once foreign reserves reached $25 billion, up from September’s $19.6 billion.
The bank said in a statement it had moved to a “liberalised exchange rate… to create an environment for a reliable and sustainable supply of foreign currency.”
Egypt has struggled to boost its foreign currency reserves in the political and economic turmoil following the January 2011 uprising that toppled former ruler Hosni Mubarak.
The central bank’s move follows comments last week from IMF chief Christine Lagarde claiming Egypt was undergoing a currency “crisis” and suggesting a quick devaluation to tackle a widening gap between the official and black market rates.
Following Thursday’s announcement, the dollar was trading on official markets at between 13.5 and 14 Egyptian pounds, according to several banks contacted by AFP, up sharply from the previous official rate of 8.8. Egypt’s EGX 30 index jumped more than 8 percent after opening to 9231 points.
On the black market this week the dollar was trading at a historic high of 18 pounds before losing its value amid speculation of a devaluation.
Importers and businesses had been forced to resort to the black market for dollars, with the high prices making their businesses increasingly unfeasible.
The central bank said banks would be allowed to open until 9pm (1900 GMT) and over the weekend to make transactions.
‘Recovery’
The bank’s decision should help undercut the black market trade and ease access to dollars, said Mohamed Abu Basha, an economist with EFG Hermes investment bank.
“We should start to see money migrating from outside the banking system to the banking system,” he said.
“In a few months we should expect to see a start of a recovery in economic activity,” he added.
The country’s foreign currency reserves of $19.6 billion in September were than 50 percent below the level in early 2011.
Much of the money went to propping up the pound against the dollar with incremental devaluations well short of the rates offered by the black market, increasingly the only recourse for importers.
In an interview last week with Bloomberg Television, Lagarde applauded Egypt’s planned reforms, including its austerity programme.
She said the IMF was ready to support the government if it took measures needed to meet loan conditions.
“If they decide to move forward we will certainly support that move, we will certainly accompany it, we’ll put money on the table to help them along the way. But it’s their call and it’s their decision,” she said.
IMF spokesman Gerry Rice told reporters in Washington last week that loans from Saudi Arabia and China could help Egypt gather the $5-$6 billion in additional financing required to complement the IMF lending.
Rice said Cairo had already adopted a new budget, approved a value-added tax, and developed a plan on energy subsidies.
“I think they’re very close and clearly the financing is one of the aspects that they need to lock in,” Lagarde said, commenting on the loans.
“Hopefully we’ll be able to secure the IMF board approval in the next few weeks.”