The Central Bank of Egypt (CBE) has opted to allow its currency to float freely, which will devalue its pound by an expected 48% against the dollar.
The unprecedented decision comes to meet one key requirement of a list of conditions set by the International Monetary Fund (IMF) if Egypt is to receive a loan of $12 billion over three years in an attempt to stabilise the economy. Other reforms include reducing or removing state subsidies – subsidies on household electricity and the sugar have already been cut by 40% for some Egyptians. The loan, though provisionally agreed by Egypt and the IMF in August, has yet to be ratified.
Today's move means one US dollar should now buy 13 Egyptian pounds, an increase from the nine pound mark the central bank was hoping to remain at.
Following the Thursday morning announcement, Egypt's main stock index jumped over 8%. The bank also increased interest rates 3 percentage points to 14.75%.
While allowing the currency to float should help somewhat to remedy an economy that has been in the doldrums for half a decade, following the 2011 Arab Spring scared away foreign investment, it will mean further hardship for Egyptians as the cost of imported goods surge.
The Egyptian central bank said in a statement:
"The CBE hereby announces its decision to move, with immediate effect, to a liberalised exchange rate regime in order to quell any distortions in the domestic foreign currency market.
"This move will allow market demand and supply dynamics to work effectively in order to create an environment of reliable and sustainable provision of foreign currency."
