Egypt Free Floats Pound, Raises Lending Rates to Spur Economy

  • Government has pledged economic overhaul ahead of assistance
  • IMF board to consider $12 billion if Egypt meets conditions

Egypt Allows Currency to Float in Economic Overhaul

Egypt took the dramatic step of allowing its currency to trade freely as it announced measures to stabilize an economy crippled by a dollar shortage that has raised concern about social unrest.

Stocks jumped the most in eight years and the pound slumped after the central bank’s decisions, which included raising its two benchmark overnight interest rates by three percentage points. They came after months of negotiations with the International Monetary Fund over a $12 billion loan that’s seen as crucial in western capitals to preventing an economic meltdown that could destabilize the most populous Arab country.

"It’s a historic move for Egypt,” said Hisham Ezz Al Arab, chairman of Commercial International Bank Egypt, the country’s biggest lender listed on the stock exchange. He spoke after a meeting of top bank executives with the central bank. “It proves the government is serious about the reform.”

Egypt has struggled to revive its economy since the 2011 uprising that ended Hosni Mubarak’s three-decade autocratic rule and the ouster of his Islamist successor two years later. While the measures are expected to be followed by reducing energy subsidies -- steps that will all but seal the IMF bailout -- President Abdel-Fattah El-Sisi now has to manage the immediate fallout on a population facing the highest level of inflation in at least seven years.  

Sugar Shortage

Foreign-currency reserves have stabilized this year, though remain more than 40 percent below their Mubarak-era levels. The shortage led to the emergence of a black market for the dollar, with the parallel rate as much as double the official rate. The crisis also curbed imports, causing shortages in commodities such as sugar.

The IMF welcomed the flexible exchange rate and said the new system means people will be prepared to sell dollars as well as buy them, injecting more money into the economy. It will also help attract foreign investment and support tourism and exports, it said.

How quickly that may happen remains to be seen. Some Egyptians said they are also bracing for further price increases with their salaries already over-stretched.

“It either kills the black market or flourishes it depending on whether the central bank pumps dollars in the market or not,” said Tamer Fathy, manager at the Al Masriya currency exchange in Cairo. “People are still hesitant, waiting to see what happens.”

Ahmed Hassan , 45, an accountant with four children, said people needed to look carefully at the measures.

“These decisions are not studied enough and are serving the special interest of a certain group of people,” he said. “How can we make ends meet with the expected price increases while salaries aren’t increasing. We want to be able to buy our needs -- nothing more. I don’t want to have to work a second job.”

Securing Aid

A key measure of success will be whether banks could provide enough dollars to meet pent-up demand. With investors and tourists staying away, Egypt has relied on billions of dollars of aid from Gulf monarchies since the ouster of Mubarak. The support has dwindled amid the drop in oil prices, prompting the government to turn to the IMF for help.

As part of the agreement with the IMF, Egypt needed to secure as much as $6 billion in support. Egypt got $2 billion from Saudi Arabia and $1 billion from the United Arab Emirates. A central bank official said on Oct. 30 that the country has reached a currency-swap deal with China valued at $2.7 billion.

“In the short term we will have to see the banks’ ability to make dollars available,” said Mohamed El Damaty, vice chief executive officer of Egyptian food producer Arabian Food Industries. The company’s shares were up 2.6 percent in Cairo as the benchmark EGX 30 Index surged as much as 8.3 percent before trimming gains.

Taking Steps

Policy makers set a tentative exchange rate of 13 pounds per dollar, plus or minus 10 percent, until it holds an auction at 1 p.m. local time. The currency will float freely after the sale, according to two bankers familiar with the decision. The central bank said its decision to immediately liberalize the exchange rate is part of Egypt’s “home-grown reform program, backed by the support of the international community.”

Other decisions by the central bank include:

  • Abolishing the “priority imports list”
  • Banks and other market participants are at liberty to quote and trade at any exchange rate
  • The central bank will continue to monitor market activity and hold multiple price auctions when deemed necessary
  • Banks can keep branches open until 9 p.m. and during the weekend to execute foreign-currency exchange and cash workers’ remittances
  • Cash deposit and withdrawal limits for companies importing non-basic goods are maintained at $50,000 monthly for deposits and $30,000 daily for withdrawal

“Before we increase our exposure to Egyptian assets, we want to see that the entire process is seamless,” said Tariq Qaqish, the Dubai-based head of asset management at Al Mal Capital PSC. “Like getting money into and out of the country.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE