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Egypt devalues pound, signals move toward floating currency

CAIRO – Egypt’s central bank took a step toward floating the currency on Monday, devaluing the Egyptian pound by 13 per cent in hopes of alleviating a dollar shortage that has fueled a black market and crippled businesses but raising the prospect of price hikes that could cause a backlash on the streets.

In a surprise auction, the bank set the price for a dollar at 8.85, compared to the previous 7.73 Egyptian pounds to the dollar. It also hinted it could allow the currency to slide further by saying it would adopt “a more flexible approach” in the future.

The policy would better “reflect supply and demand,” the bank said in a statement.

Markets welcomed the devaluation, with the EGX 30 benchmark index rising 6.7 per cent over the day.

Economists have long seen the step as necessary to spare the treasury from spending badly needed foreign currency to prop up the Egyptian pound.

“The move has motivated new mutual funds and foreign investors to enter the market again and this was proven today,” said Hannan Ramsis, a trader at the Egyptian stock exchange.

Many Egyptians are worried, however, that the move will cause a surge in prices, especially given that Egypt imports a multitude of goods ranging from raw materials to cooking oil. That would add to the strain of an underperforming economy that has yet to recover from years of turmoil since the 2011 ouster of longtime autocrat Hosni Mubarak.

“It could on the short term lead to economic, political and social disturbances and labour strikes, but on the longer term it could attract foreign investments,” said Saeed Sadek, a professor of political sociology at Cairo’s private Future University.

Prices have been rising under the rule of President Abdel-Fattah el-Sissi, who as military chief led the ouster of Egypt’s first elected leader, Islamist Mohammed Morsi, whose chaotic rule fueled mass protests. El-Sissi cut fuel subsidies in 2014 by more than 70 per cent, causing a public outcry but pleasing economists who saw it as a necessary step to save funds better used elsewhere.

Foreign reserves have been stable for months and stood at $16.5 billion in February, a far cry from their $36 billion level right before the January 2011 uprising, when tourism and its associated hard currency peaked.

Egyptian authorities had taken a number of moves to manage the foreign currency shortages, including capping the amount of dollars that could be deposited at local banks and limiting access to them to more essential businesses in the industrial and health sectors. But much of it only exacerbated the matter, and the deposit and withdrawal limits have since been lifted.

Last week, the black market exchange rate reached nearly 10 pounds to a dollar, before falling at the weekend to around 9 and dropping slightly lower after Monday’s central bank auction.

The sale of just under $200 million to banks was the second such surprise offering since last week, when the central bank made $500 million available. The rules allow banks a 0.10 pound band of leeway for trading, and after the auction the National Bank of Egypt said it would sell dollars at 8.95 pounds and buy them at 8.9 pounds.

Mohamed Abu Basha at Egyptian bank EFG-Hermes said the central bank announcement meant that the country was returning to the managed float regime it maintained between 2004-2011, and that it was now likely to link the pound to a basket of currencies.

“This is important to reflect market dynamics and alleviate pressure on the central bank of having to defend a currency peg,” he said. “It’s also important to preserve Egypt’s competitiveness against trading partners.”