Egypt took the unprecedented step of allowing its currency to trade freely as it announced a series of sweeping measures to stabilize the economy.
Among other changes announced by the central bank early Thursday was a 300 basis point increase to the key lending rates. Egypt’s currency crunch has crippled business activity and fueled shortages in key commodities, fanning discontent in a country already frustrated by higher taxes and faster inflation.
Egypt “announces its decision to move, with immediate effect, to a liberalized exchange rate regime in order to quell any distortions in the domestic foreign currency market,” the central bank said on its website.
The measures move Egypt closer to securing a $12 billion loan from the International Monetary Fund. The country’s 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.
The central bank 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.
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.
The exchange rate will now be set by “supply and demand,” Governor Tarek Amer said by phone early Thursday. In a statement on its website, the central bank said the measures would help end a black market in the Arab world’s most-populous country.
“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.”
The country has already secured $3 billion from Saudi Arabia and the United Arab Emirates and less than $1 billion from Group of Seven countries.
“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.”