Crisis averted? Egypt caves in to IMF, floats pound

Crisis averted? Egypt caves in to IMF, floats pound
Video: Egypt's pound to be traded freely as part of an effort to stabilise the country's economy and secure a multi-billion dollar IMF loan.
3 min read
03 November, 2016

Egypt-Floating pound

Egypt has taken the unprecedented step of free floating its currency as part of an effort to stabilise its economy, the country's dentral bank announced on Thursday. The Egyptian government had been reluctant to take this step but it is a condition for a multi-billion dollar loan from the International Monetary Fund agreed earlier.

The move allows the Egyptian pound to be traded freely for the first time, meaning Egypt will no longer be able to fix its value.

While economic experts believe it is necessary to halt the current currency crisis, they have argued that it would do little to improve the economy in the long term without structural policy reforms with emphasis on redistribution. 

"This shock to the system could simply stabilize a weak economy that has long failed to serve its most vulnerable segments or it could be used as an opportunity to create space for more expansive development and redistributive policies that will help break the cycle of poverty," wrote Egypt expert Timothy Kaldas in October.

In a statement on its website, the central bank said that Egypt "announces its decision to move, with immediate effect, to a liberalised exchange rate regime in order to quell any distortions in the domestic foreign currency market". 

A 300 basis point increase to key lending rates was also announced by the body.

Egypt has been struggling to boost its foreign currency reserves in the political and economic turmoil following the January 2011 uprising that toppled former ruler Hosni Mubarak.

With the country's once-thriving tourism industry having taken a huge hit amid security concerns, investors have also shyed away from taking their dollars to Egypt. This has crippled Egyptian business, and led to shortages in basic goods and public demonstrations of discontent.

Economy in crisis

The sketchy state of Egypt's economy has even led to fears among some western politicians that a refugee crisis could ensue if the situation worsens.

The pound will be traded at a tentative exchange rate of around 13 pounds per dollar, as set by the central bank.

This rate will hold until the bank's auction at 1pm local time. According to banking sources who spoke to Bloomberg, the currency will be floated after this.

At present, the pound is being artificially strengthened by capital controls from the central bank, keeping it at around 8.8 per dollar. Many experts expect the pound to be devalued for a second time this year, after it was devalued by 14 percent in March.

The pound had strenghened on the black market, where the exchange rate to the dollar had diverged greatly from the official rate, ahead of the decision.

According to a Reuters report Wednesday, the dollar was being sold on Sunday at 18-18.2 pounds and bought at 17.5-17.85 on the black market, more than twice the official rate of 8.8 pounds at the time.
By Wednesday evening, it was being sold at 13-13.5 pounds and bought at 11-11.5, having strengthened 2 pounds in a single day, black market traders said.

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