The National Bank of Egypt allowed the Egyptian pound to float on Thursday in a bid to to shutter the thriving black market for U.S. dollars in the country. While returning the Egyptian currency markets back to normal was one of the objectives, the move was also needed to fulfill one of the conditions of a three-year, $12-billion Extended Fund Facility from the IMF, which was agreed upon in August of this year.
Along with the free-floating of the Egyptian pound, the central bank also raised interest rates by 300 basis points (3 percent) to keep inflation in check, “Inflation rates already soared; this is history and we’re working on limiting this,” said Tarek Amer, Governor of the National Bank of Egypt.
At press time, the Egyptian pound has dropped by close to 50 percent against the greenback; on Wednesday, 1 dollar would buy about 8.88 Egyptian pounds; on Thursday, 1 dollar bought 13.7 pounds; today, the USD/EGP rate is hovering around 15.55:
Just like Nigeria, Egypt has been experiencing acute dollar shortages for the last several years. The ousting of former Egyptian president Hosni Mubarak in February, 2011, has left the tourism industry - which was a major source of foreign currency inflows into Egypt - in shambles.
The unstable political situation has also scared off foreign investors, which has further exacerbated the dollar shortage in Egypt.
The IMF and Egyptian authorities are hoping the loan program, along with a competitive exchange rate, will set the stage for more foreign capital inflows and a gradually improving economic environment.
IMF managing director Christine Lagarde praised the Egyptian authorities for taking the necessary steps, "The way in which it is handled is welcomed and it's a decision clearly that the Egyptian authorities have matured and deliberated and are putting in place for the Egyptian economy and for the Egyptian currency," she told Reuters, in an interview at the IMF economic conference in Washington, on Thursday.
However, many Egyptians who have been dealing with rising prices and government-imposed rationing of food and medical items, don’t seem to share Lagarde’s enthusiasm.
According to a WSJ report, Ahmed Fathi, a cab driver and father of two, is worried about the plunging Egyptian pound and what impact the devaluation will have on his finances, “What matters to me is how much will this affect my expenses, because it has been stretched to the maximum,” he says.
The currency devaluation did have a positive effects on the Egyptian stock market (EGX30), which spiked to a high of 9231.07.
