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November 4, 2016

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Egypt devalues, floats currency to secure US$12b bailout loan

EGYPT devalued its currency by 48 percent yesterday and announced the pound would be allowed to float — measures that meet a key demand by the International Monetary Fund in exchange for a US$12 billion loan over three years to overhaul the country’s ailing economy.

The devaluation pegged the Egyptian pound at 13 to the US dollar, up from 8.8 pounds on the official market.

A Central Bank foreign currency auction was scheduled for later, according to the official MENA news agency. By the afternoon, banks sold the US dollar, the most sought-after hard currency in Egypt, for 14.30 pounds and bought it for just 13.

The flotation was virtually certain to cause a steep hike in prices, piling up pressure on President Abdel-Fattah el-Sissi’s government to avoid a popular backlash against its handling of the economy.

El-Sissi has repeatedly urged Egyptians in recent weeks to rally behind him as he grapples with the country’s worst economic crisis in decades, arguing that there was no way out of the economic crisis unless Egyptians “endure and be patient.”

El-Sissi, a general-turned-president elected in 2014, has pledged to do all he can to protect Egypt’s poor from the inflationary fallout that is certain to come with economic reforms. Last week, he said the military would distribute a one-off package of basic food items such as sugar and rice at half price among poor Egyptians.

Also yesterday, the Central Bank raised by 3 percentage points its two key overnight interest rates.

The bank said the measures were part of the government’s reform program and designed to “completely end” the unofficial — or black — currency market. The measures, it added, will “empower the Egyptian economy to face the present challenges, unleash its potential and achieve the hoped-for growth.”

“The flotation is an excellent, overdue step that, thank God, we took it,” Egypt’s business tycoon Naguib Sawiris wrote on his Twitter account. “We must all help to make this step a success.”

The much-heralded Central Bank decision followed a sharp and sudden decline this week in the value of the dollar on the unofficial market, plunging from an all-time high of 18.25 pounds to around 13 to the US currency.

The IMF’s executive board has yet to ratify the US$12 billion loan provisionally agreed by Egypt and the lender-of-last-resort in August.

Chris Jarvis, the IMF mission chief in Egypt, welcomed the development, saying the pound’s flotation would enhance the country’s “external competitiveness, support exports and tourism and attract foreign investment.”

“All of this will help foster growth, job creation and stronger external position for the country,” he said in a statement.


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