Egypt’s central bank devalued the pound by about 13 per cent yesterday and said it would be more flexible in managing its pegged currency to kill off the black market for dollars and boost exports.
The currency was devalued to 8.85 pounds from the official rate of 7.73 pounds in a US$200 million auction yesterday. It took the market by surprise after the central bank governor complained in recent days in the Egyptian media that the pound was not fairly valued and denied any plans to devalue the currency.
Outside the auction system, the pound was devalued to 8.95 pounds to the US dollar from 7.83 pounds as the central bank sells the dollar at a slight discount to banks in the auction.
Investors cheered the decision, pushing up the benchmark stock gauge, the EGX30, by 6.7 per cent. Real estate companies including Talaat Mustapha Group and Sixth of October Development led the gains on anticipation that higher inflation will drive property sales in a bid to preserve purchasing power. The devaluation could also benefit some UAE investors active in the country such as the retail conglomerate Majid Al Futtaim and builder Arabtec.
Egypt relies heavily on inflows of hard currency and has been suffering for years from decreasing receipts from key sources including foreign direct investment, the Suez Canal, remittances from Egyptians abroad and tourism – especially since the downing of a Russian jet exploded in October over Sinai.
In recent weeks the spread between the official rate and the black market rate, which was trading as high as 9.8 to the dollar, widened to the highest level in more than a decade.
"The challenges facing the Egyptian banking sector are obvious to everyone. The most important of these is the scarcity of foreign currency," Ahmed Ismail Hassan, the chief executive of National Bank of Abu Dhabi's Egyptian operations, told The National two weeks ago. "Foreign currency is needed by almost everyone to grow and import their raw materials."
Yesterday’s decision was welcomed by economists who had urged the central bank to devalue at a time when emerging market countries have been vying with each other for US dollars by weakening their currencies.
Egypt has resisted letting its currency freely float and has instead made piecemeal devaluations since the uprising that removed the former president Hosni Mubarak in February 2011. The cost of defending the Egyptian pound has been high, however.
Despite the billions of US dollars pumped into Egypt by its oil-rich allies in the Arabian Gulf, including the UAE, the country’s foreign reserves have been reduced by more than half to about $16 billion since 2011. In that time Gulf nations have pumped more than $20bn into Egyptian coffers.
Still, despite greeting the move, some economists cautioned that the success of any new management of the currency will depend on how willing the central bank will be to allow the pound to fluctuate. The central bank has not said what its new flexible policy will be, but some economists including Simon Williams at HSBC in London are speculating that the central bank will dispense with the auction system put in place in 2012 and return to a so-called managed float.
“The credibility of the new regime will depend on the volatility the CBE allows and its readiness to allow the currency to weaken further if necessary to let the market clear,” Mr Williams wrote in a report to clients.
“While greater flexibility will likely lead to a rise in inflation in the near term, it is imperative if reserves are to recover as CBE intends, confidence in the convertibility of the pound is to be rebuilt and capital inflows are to pick up.”
“Just like other foreign carriers operating in Egypt, Emirates continues to face difficulties in repatriating foreign funds to its centre of operations in Dubai. We are working closely with the relevant authorities to address the issue and reach a long-term resolution which is in the best interests of both parties.”
“Countries will go through ups and downs and thus we will, of course, continue to monitor carefully matters such as relative value of currency and how it changes over time. Quite frankly we put more of our efforts on developing structures and solutions that can be resilient enough to last these cycles.”
“As with any emerging market, there is always some degree of currency volatility. We believe that the long-term fundamentals of the country remain strong and we remain bullish about Egypt’s renewable energy programme.”
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