Egypt devalues currency by nearly 13%

The Central Bank of Egypt (CBE) has devalued the Egyptian pound by nearly 13%, to 8.85 against the US dollar (USD) from 7.73 previously. It said that the move was to eradicate a black market and ease growing downward pressure on the currency.

The CBE also pledged to follow a more flexible exchange rate policy in a bid to resolve market imbalances and improve transparency and foreign exchange (forex) liquidity. It expects its reserves to rise to about US$25bn by the end of the year from about US$16.5bn in February, but did not explain how that would be achieved.

“The central bank affirms that it will follow up closely all the developments and will not hesitate to use all the tools and authority at its disposal to maintain order in the currency market and stability in price levels in the medium term,” a statement by the bank read.

The move was welcomed by Mohamed Zaki El-Sewedy, chairman of the Federation of Egyptian Industries (FEI). “This is a move that all investors hoped for, whether local or foreign,” he said. “This is will make the market more stable, boosting the availability of foreign currency in the market.”

Reports suggest that the move is likely to help boost Egypt’s foreign investments, easing a dollar squeeze that threatens economic growth in the most populous Arab country. Foreign-currency reserves have fallen by more than 50% since civil unrest broke out in January 2011, although they have recently stabilised at just over US$16bn.

“It’s a welcome, but long overdue shift in policy stance – Egypt could have saved billions in reserves if it had done this 18 months ago,” Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings, told Bloomberg .

“The question now is will they follow through – if the Egyptian pound needs to weaken further, will they let it? Are the authorities really ready to tolerate the rise in inflation this will inevitably bring?”

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