Egypt Free Floats Pound, Raises Lending Rates to Spur Economy

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Thursday - 3 November 2016

Egypt took the unprecedented step of allowing its currency to trade freely as it announced a series of sweeping measures to stabilize an economy battered by a crippling dollar shortage that has raised fears of 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 3 percentage points. The measures move Egypt closer to securing a $12 billion loan from the International Monetary Fund.

“We’ve been expecting this for a long time, and it is very positive,” Rami Sidani, head of frontier investments at Schroders Plc in Dubai, said by phone. “We expect a lot of interest in Egypt, it’s a massive economy that has been put on hold for years.”

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 foreign-currency reserves have stabilized this year, they are still more than 40 percent below their Mubarak-era levels.

The country’s economic woes are such that they have become an area of focus in global capitals. There’s shared concern that maintaining stability in Egypt is important, a U.S. Treasury official said last month on condition of anonymity. In Germany, government officials fear that any economic collapse could lead to a fresh wave of refugees.

International Support

The crisis prompted the government of President Abdel-Fattah El-Sisi to turn to the IMF, whose managing director, Christine Lagarde, said authorities needed to act on the exchange-rate and lower energy subsidies before the board can consider the country’s loan request.

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.”

“This move will allow market demand and supply dynamics to work effectively,” it said.

Managing the fallout on average Egyptians struggling with surging prices will be a key test for El-Sisi, whose government is also trying to revive a tourism industry battered by terrorist attacks in Sinai. The inflation rate is at the highest in at least seven years.

The benchmark EGX 30 Index for stocks surged 8.3 percent in early trading in Cairo. The currency’s 12-month non-deliverable forwards plunged more than 10 percent to a record 16.6758 per dollar at 9:45 a.m. in Cairo.

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 pound has repeatedly dropped to records in the black market and depreciated to 17.98 per dollar in Bloomberg’s most recent survey of currency dealers earlier this week.

“Once you have a floating rate, this gap between the official and black market rates narrows pretty quickly, unless the government interferes, which it shouldn’t,” said Tariq Qaqish, the Dubai-based head of asset management at Al Mal Capital PSC. “Before we increase our exposure to Egyptian assets, we want to see that the entire process is seamless, like getting money into and out of the country.”