Egypt: Central Bank free floats the pound
November 4, 2016
The Central Bank of Egypt (CBE) unexpectedly announced the free-floating of the pound on 3 November in an attempt to alleviate an ailing economy struck by a severe shortage of U.S. dollars, waning international reserves and a widening margin between black and official exchange rate markets. Earlier that day, the CBE had devalued the currency to 13 EGP per USD, which represented a weakening of 46.3% from 8.88 EGP per USD previously. The new rate was intended to serve as guidance to jumpstart the market, from where the Bank would then float the pound.
The timing of the move came as a surprise since the Bank had previously stated that it would take place if and when reserves exceeded USD 25.0 billion (September: USD 19.6 billion). The move towards a free floating regime was a necessary condition for the IMF board to consider granting Egypt a USD 12.0 billion loan, which would help plug the severe fiscal deficit the country is set to run this year. IMF officials praised the step taken towards normalizing the currency, stating that it will improve Egypt’s external competitiveness and support exports and tourism.
In addition to the decision to float the pound, the Central Bank increased its main policy rate by 300 basis points to 14.75% in a bid to rebalance the currency market, beset by weeks of volatility. The CBE also abolished a priority list for imports and extended the time and day limits during which banks are allowed to execute foreign currency exchanges, but maintained caps on cash deposits and withdrawal limits for firms importing non-basic goods.
Although the decision has been well received by investors and economists alike, the mood within the country is far from sanguine. Against a backdrop of double-digit inflation, a weaker pound will likely exacerbate prices for imported goods, most importantly fuel and food products. This is unlikely to bode well with Egyptians, who are already suffering from the scrapping of subsidies in electricity prices and the introduction of a Value-Added Tax. Egypt’s debt obligations in dollars will also weigh on the state’s coffers. Nonetheless, the CBE’s move shows its commitment to implementing much-needed economic reforms and will also help to replenish the country’s foreign currency reserves, ease pressure on businesses and restore investor confidence.
Author: David Ampudia, Economist