Egypt’s central bank has effectively devalued its currency – the pound – by allowing it to trade freely. It fell by around a third against the dollar on Thursday.
Point of view
[This] will improve Egypt's external competitiveness, support exports and tourism and attract foreign investmentIMF mission chief for Egypt
The move was praised by bankers and the International Monetary Fund as a big step toward stabilising Egypt’s economy and attracting foreign investment.
Egypt has struggled to attract dollars since a 2011 uprising that drove away tourists and foreign investors. That has forced the central bank to ration supplies of hard currency and impose strict capital controls, hampering trade in a country that relies on imports of everything from cars to food.
The shortage of dollars has slashed imports and fueled a currency black market.
One banker, Ramadan Farouk Ibrahim, welcomed the stimulus. He said: “Imports stopped for a couple of months, but when we produce we won’t need dollars to import goods or anything else. So let’s produce more, and if we do that through raising crops, and from our factories, then in the future we won’t need dollars. We won’t care about the rise and fall of the value of the dollar, the Egyptian pound will prove its worth when we produce, in the past we relied on imported goods.”
Along with other economic reforms, including cutting government subsidies on fuel and food, floating the pound should help Cairo secure a $12 billion (10.8 billion euros) three-year IMF loan and stave off an economic meltdown in a country with a budget deficit of 12 percent in the 2015-16 fiscal year.
“This will make more foreign exchange available. The flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment,” the IMF’s mission chief for Egypt, Chris Jarvis, said.
But it will also push up prices, at a time of already high inflation.
Ironically, #egypt pound float could be +ve for inflation if it brings down blackmarket premium for $. Most importers buy $ from blackmarket— Mohamed Abdelmeguid (@MrMopec) November 3, 2016