Egypt: Central Bank devalues Egyptian pound, announces move to a more flexible exchange rate regime
April 6, 2016
The Central Bank of Egypt (CBE) devalued the pound notably against the U.S. dollar on 14 March and announced that it would move toward, “a more flexible exchange rate regime.” The reference rate for the pound was set at a multi-year low of 8.88 EGP per USD, which represented a 13.4% devaluation over 7.83 EGP per USD, where it had been resting since November of last year.
By devaluating the currency, the Central Bank aims at alleviating the foreign currency crunch that is restraining Egypt’s economy. Since the 2011 revolution, the country’s foreign currency reserves have been in free fall, dragged down by subdued foreign investment and exports, weaker tourism revenues and lower receipts from the Suez Canal.
The Central Bank also removed several foreign currency restrictions that had been adopted in recent years. The CBE removed caps on the withdrawals and deposits that individuals could make and restrictions for importers of essential goods, in order to increase liquidity in the baking system and ease pressure on local businesses, which had been struggling to pay for imports.
The devaluation of the currency and the plan to move to a more flexible exchange rate regime are a step in the right direction to restore foreign currency reserves, ease pressure on businesses and restore investor confidence. According a recent statement, the Bank envisages switching to an exchange rate system that, “better reflects the underlying forces of supply and demand.” Since 2012, the Bank had controlled the exchange rate through regular foreign currency auctions. While the Bank did not provide details about what kind of exchange rate system it would change to, the decision to adopt a more flexible regime may signal the gradual switch toward a managed float.