CAIRO (Reuters) - Egypt’s central bank floated the pound currency on Thursday, devaluing by 32.3 percent to an initial guidance level of 13 pounds to the U.S. dollar in a move to rebalance currency markets after weeks of turbulence.
The Egyptian pound had been pegged at 8.8 to the dollar since March, but a shortage of dollars in the economy had put the currency under intense downward pressure in recent months.
Egypt has struggled to earn dollars since a 2011 uprising drove away tourists and foreign investors -- the country’s main sources of foreign currency.
The central bank has been rationing dollars and imposing strict capital controls whilst maintaining the pound at an artificially strong official rate hampering trade in a country that relies on imports of everything from cars to food.
A rapid slide on the black market to 18 earlier this week prompted importers to cease buying greenbacks. The rate then strengthened to 13 per dollar by late on Wednesday, creating a rare opportunity for the central bank to devalue.
In a surprise announcement early on Thursday, the central bank said it had gone further than bankers expected, to freely float the Egyptian pound. 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.”
With a budget deficit of 12 percent in the 2015-16 fiscal year and currency markets facing severe distortions, Egypt reached a preliminary deal with the International Monetary Fund in August for a $12 billion three-year loan to support an economic reform programme.
As part of those reforms, Egypt was widely expected to devalue the pound and ditch its currency peg to the dollar for a more flexible exchange rate mechanism, a move economists say could unlock billions of dollars in foreign investment.
“There will be relief in the market and with companies that the devaluation has happened,” said Angus Blair, Chief Operating Officer of Pharos Holding, a Cairo-based financial services company. “The resetting of Egypt’s economic equation has begun at last, but much more needs to be done by the government to reform the economy.”
Bankers told Reuters they had been informed that the central bank would set an initial guidance rate of 13 pounds per dollar and that banks would initially be allowed to trade within a 10 percent band above or below the new rate until an exceptional foreign exchange sale at 1.00 p.m. (1100 GMT).
After the results of the auction are announced the band will be removed, according to a central bank memo that was sent to banks earlier on Thursday and seen by Reuters.
The central bank will offer $4 billion at the exceptional auction, bankers said, for which banks can bid and offer freely. The central bank said the new rate was non-binding and would serve as “soft guidance to jumpstart the market”.
“Banks and other market participants are at liberty to quote and trade at any exchange rate. Bid and ask exchange rates will be determined by forces of demand and supply,” it said.
“The CBE will use the prevailing market rate for any transactions it undertakes.”
Egypt’s dollar bonds rallied 2 percent across the curve after the flotation. Egypt’s stock index surged 8.3 percent on the news with many stocks rising to their 10 percent daily limits.
The central bank also said in a statement that it would abolish the priority list for imports and that banks would be allowed to operate until 9 p.m. every day, including weekends, for foreign exchange transactions and transfers only.
Additional reporting by Eric Knecht, Nadia El Gowely, Amina Ismail and Ahmed Aboulenein; Editing by Ahmed Aboulenein and Catherine Evans
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