November 3, 2016 / 11:40 AM / 3 years ago

UPDATE 4-Egypt floats pound, eyes IMF deal within days

* Pound allowed to fall to 14.65 per dollar

* Central bank hikes interest rates by 300 bps

* Currency flotation wins praise from IMF

* Central bank says no going back

* Egypt struggling to earn dollars since 2011 uprising (Recasts, adds details)

By Lin Noueihed, Eric Knecht and Ahmed Aboulenein

CAIRO, Nov 3 (Reuters) - Egypt floated its currency on Thursday and said it would make a final push to secure a $12 billion IMF loan within days as it seeks to overhaul its dollar-starved economy and unlock foreign investment.

Egypt initially devalued the pound by about a third early on Thursday, taking it from its previous peg of 8.8 to the dollar to an initial guidance rate of 13 before allowing the currency to drift down to about 14.65 at a special dollar auction.

From Sunday, the rate will be determined not by the central bank but by banks trading via the interbank system, with Central Bank Governor Tarek Amer telling a news conference there would be “no going back”.

Egypt’s dollar bonds rallied across the curve on the float, which came as soaring inflation and sugar shortages had threatened to trigger social unrest. Egypt’s stock index also surged, initially rising 8.3 percent, on the news.

Bankers and economists said the float would help restore investor confidence after the 2011 revolt ushered in a period of political upheaval that drove off tourism and foreign investment - vital sources of hard currency.

Hisham Ezz al-Arab, chairman of Egypt’s largest listed bank CIB, called the float an “historic” step that had exceeded expectations and would help attract foreign investors.

“For the last tens of years we were talking about the exchange rate as a target ... It’s the first time ever we talk about the exchange rate as a tool,” he told Reuters.

Egypt had faced pressure to devalue since 2011, as dwindling foreign exchange reserves forced the central bank to ration dollars and impose capital controls that hampered trade in a country that relies on imports of everything from cars to wheat.

The central bank devalued by more than 10 percent in March, but the move failed to ease downward pressure on the currency as importers, unable to obtain dollars at banks, were forced to turn to a booming black market.

The pound tumbled on the black market in recent weeks to reach a record low of 18 against the dollar on Sunday. The slide prompted importers to stop buying, helping the black market rate strengthen to 13 again by Wednesday night.

The central bank seized this rare opportunity to devalue its official rate to the new black market level - a drop of more than 32 percent - and ditch the dollar peg the same day.

It simultaneously hiked benchmark interest rates by 300 basis points to buoy the currency.

“The Central Bank of Egypt 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,” it said in a statement.

“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.”

CLINCHING THE IMF DEAL

Egypt’s general-turned-President Abdel Fattah al-Sisi seized power in mid-2013 promising to restore stability after a year of divisive Muslim Brotherhood rule, but has faced growing criticism as economic problems have piled up.

With a budget deficit of 12 percent and a looming funding gap, Egypt reached a preliminary deal with the IMF in August for a $12 billion loan to support its programme of economic reforms.

But it has yet to win IMF board approval for the three-year package, which involves painful austerity measures and requires Egypt to secure a further $5-6 billion in bilateral financing.

The IMF, which has long called for a more flexible exchange rate in the Arab world’s largest nation, welcomed Thursday’s float but did not say if it was enough to seal the deal.

“This is a welcome move given the economic circumstances,” IMF managing director Christine Lagarde told Reuters on the sidelines of a conference in Washington.

Addressing a news conference at the end of the day, Amer said Egypt had secured pledges from China, G7 countries, Arab allies and others that would help it plug a projected $16.3 billion budget deficit for the 2016-17 fiscal year.

He said the government would pursue reforms but protect the poor from the potential inflationary effects of devaluation and had allocated $1.2 billion last month to provide essential food.

A government source said late on Thursday gas and diesel prices would rise 30-47 percent from midnight as Egypt pushes ahead with a politically-sensitive programme of subsidy cuts that previous governments had shied away from.

“Our goal is to complete the IMF deal because this is important as a certificate of confidence for us... and we think that within a few days we can present (our reforms) to the IMF,” Amer said.

The central bank sold almost $100 million at a special auction on Thursday where banks said they were allowed to bid freely, a shift from previous sales. The central bank said the average bid price was about 14.65 pounds to the dollar, with a cut-off rate of 14.3 and a maximum rate of 15.6 to the dollar.

The central bank also said it would abolish a priority list for imports which had channelled scarce dollars to items such as essential food or medicine and forced importers of other goods to the black market.

“We are totally committed to these exchange rate policies and there is no going back on them,” Amer said. (Additional reporting by Nadia El Gowely and Amina Ismail; Writing by Lin Noueihed; Editing by Mark Heinrich)

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