Egypt pound slumps as central bank floats currency

Egypt’s pound plunged in value on Thursday as the central bank floated the currency to address a dollar crunch that threatened to cause some imports to grind to a halt.
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 rate of 8.8.
The government of President Abdel Fattah al-Sisi is rolling out an austerity programme and seeking billions in support from abroad in order to meet conditions, including devaluation, for a $12 billion loan from the International Monetary Fund.
Floating the pound had long been among a list of measures demanded by investors and international creditors, but had been avoided in the fear that rising prices could provoke unrest.
Thursday’s central bank decision came as a surprise, after officials said they would only consider a flotation once foreign reserves reached $25 billion, up from September’s $19.6 billion.
The bank said 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.
Central bank governor Tarek Amer said that from Sunday all banks would have full currency controls without any interference from the regulator, describing the move as “historic”.
“We are fully committed to the flexible exchange rate policy,” Amer said at a news conference in Cairo. “There are no restrictions over dollar transactions at banks.”
The IMF welcomed the central bank’s decision, saying it would “make more foreign exchange available”.
The move “will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment,” IMF mission chief for Egypt Chris Jarvis said in a statement.
The flotation 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.
Egypt’s EGX 30 stock index jumped more than eight percent after opening to 9,231 points.
On the black market this week the dollar was trading at a historic high of 18 pounds before losing 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 9:00 pm (1900 GMT) and over the weekend to make transactions.
Its 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 told AFP.
“In a few months we should expect to see a start of a recovery in economic activity.”
Egypt’s foreign currency reserves of $19.6 billion in September were 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.
Amer said the government had pledged to continue subsidising food items “to protect the poor from the rise in prices”.
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.
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.”