CAIRO, 29 January 2003 — Egypt will liberalize its exchange rate from today, dropping a managed peg system and allowing banks to set rates freely, delegates at an economic conference quoted the central bank governor and prime minister as saying.
Governor Mahmoud Abu el-Ayoun confirmed there would be a change in foreign exchange rates on Wednesday, but declined to give any details.
Currently black market rates for the Egyptian pound are considerably weaker than even the bottom of its official band.
"It is an extremely good step forward...simply removing uncertainty over exchange rate policy and now we have a policy that is market-driven. You cannot ask for anything better than that," said Egyptian American Bank Managing Director Roderick Richards, who attended the meeting.
Economists have long called on Egypt to liberalize its exchange rate policies and speed up domestic economic reforms as part of efforts to revive the country’s sluggish economy.
Once considered a regional economic "tiger", Egypt — and its pound — have suffered on the back of global economic turmoil, fallout from the Israeli-Palestinian conflict and Sept. 11, and doubts about the state’s commitment to reform.
At present, the Egyptian pound may trade in a band of three percent above and below 4.51 to the dollar, but black market rates recently hit around 5.30-5.38 to the dollar compared with a weakest legal rate of 4.6453.
David Lubin, a senior emerging markets analyst at HSBC in London, said the move could be a precautionary step in expectation of war in the region.
"It may not have made sense for them to sell a lot of foreign exchange reserves defending the trading bands (in that environment)," he said.
A London bank dealer said trade in the pound had ground to a halt as bankers waited for official confirmation from the central bank on the reported changes.
News that exchange rate changes were planned emerged at yesterday’s conference, at which one delegate quoted Ayoun as telling a closed session: "As of tomorrow morning, all the banks in Egypt will set their prices independently."
The delegate also quoted Prime Minister Atef Obeid, who addressed the same session, as saying: "As of tomorrow, there is a free market where the rate is set by the market and banks will take care of all transactions...It is a free market."
Two other delegates confirmed the remarks.
But Ayoun was cagey when asked about the reported remarks.
"It will be enacted from tomorrow," Ayoun told reporters. Asked if he was referring a change in the foreign exchange rate, he said: "Yes." He would not give any additional information, but said details would be announced on Wednesday.
According to one delegate, the governor said the roughly 57 banks licensed to deal in foreign exchange in Egypt would each set their own exchange rate, which the central bank would monitor throughout the day. The central bank would then calculate a weighted average at the close of the business day.
Lubin said the move did not come completely "out of the blue" because banks had recently been able to charge commissions that in effect give them the parallel market rate.
One banker, who said his bank had been testing the market by adding the commissions, said yesterday’s rate to the dollar had been between 5.30 and 5.38. He was reluctant to say where the rate might settle, adding the market would be a bit "hectic" in the coming week.
Lubin noted that floating the currency did hold the risk of a major blow-out.
"Having said all this, there are still conflicting views as to what the new policy is, and the market is by no means clear as to what has been agreed," he said. (R)