Pound’s devaluation a “positive step” in the right direction
The Central Bank of Egypt announced today that it is allowing the Egyptian pound (EGP) to float. The EGP was devalued from EGP 8.8 per USD to EGP 13 per USD and will be allowed to fluctuate within a 10 per cent band in either direction.
The central bank tightened monetary policy alongside this announcement, raising interest rates by 3 percentage points to 14.7 per cent.
Equity markets have reacted positively. Egypt’s main stock index jumped by over 8 per cent at the start of trading today.
The EBRD welcomes the liberalisation of the exchange rate as it is a positive step in the right direction. It will improve the functioning of foreign exchange markets.
Hanan Morsy, the Lead Economist for the EBRD who covers Egypt, said: "This is a very positive development which will improve the functioning of the foreign exchange market and unlock private sector activity".
The step will help reduce foreign exchange shortages which have been impairing the private sector’s ability to import production inputs, to plan and to repatriate profits.
In addition it will increase the economy’s flexibility in response to external shocks, strengthen Egypt’s official reserve position and boost investor confidence.
The decision on interest rates will help mitigate inflationary implications of the currency move.
The devaluation of the EGP will also improve the competitiveness of Egypt’s exports and unlock private sector activity which has been hampered by the lack of foreign exchange availability.
Improved export performance is expected to help drive some of the improvement in growth that is forecast for FY2016-17, as highlighted in the EBRD’s Regional Economic Prospects report, which is published today.
The currency float and the progress in closing the external financing gap will support progress towards the approval of a US$ 12 billion Extended Fund Facility with the International Monetary Fund (IMF), which would be a positive for investor confidence.
The programme will focus on improving the functioning of foreign exchange markets , lowering the deficit and levels of public debt, and raising growth by supporting the government’s structural reform efforts.
The EBRD has invested over €1.8 billion in Egypt through 34 projects since the start of its activities in the country at the end of 2012.
The Bank’s areas of investment there include the financial sector, agribusiness, manufacturing and services, as well as infrastructure projects such as power, municipal water and wastewater services and contributions to the upgrade of transport services.