Cairo- Egypt’s Central Bank on Thursday took a “historic” but nevertheless dangerous step when it decided to devaluate its local currency, a decision expected by several observers after the Egyptian Pound fell to its historic levels, exceeding the official price by more than 100 percent last Tuesday.
The Central Bank also decided on Thursday to increase the interest rates by three percent, which is the normal result of the inflation that is expected due to a predictable increase of prices after the decision to float the currency.
Another decision issued on the same day devalued the Egyptian pound to 13 against the dollar ahead of Sunday’s float, with a margin allowing banks to move 10 percent, or 14.30 pound against the dollar, devaluating it to 32.3 percent.
On Sunday, a decision was made to allow the country’s banks to freely trade dollars on the interbank system.
Therefore, the rate of the U.S. dollar would now vary between local lenders and would no longer be set at fixed price.
The Central bank said in a statement that it had moved to a “liberalized exchange rate… to create an environment for a reliable and sustainable supply of foreign currency.”
As the first reaction to Egypt’s decision to liberalize its exchange rate, Egypt’s stock index jumped 8.3 percent in the opening minutes on Thursday, but the market then rose 3.35 percent at the end of the session that saw a high daily turnover worth more than 1.6 billion Egyptian pound.
On Thursday, the International Monetary Fund welcomed the move, saying it would improve Egypt’s external competitiveness.
The country’s Governor of Central Bank, Tarek Amer said Thursday the bank is expecting the reserves to be raised by $6 billion in the coming months.
“We are completely dedicated to the policy of exchange rate hose. From Sunday, each bank will have the total control on the way to set its exchange rate,” Amer added.
Ahmad Chamseddine, head of research department at EFG Hermes investment bank told Asharq Al-Awsat that the central bank’s decision was very positive and would gradually help solve the country’s crisis.
Chamseddine expected first a high fluctuation in the price of the dollar to later set on a fair price.
“The fair price would range between 11 to 12 Egyptian pound against the dollar,” he said.