CAIRO, 30 January 2003 — Egypt’s newly floated pound currency sagged as much as 15.5 percent on its first day of liberalized trade yesterday, roughly matching rates previously seen on the black market.
Analysts hailed the free float as a step toward a more open market which should attract greater investor interest in Egypt’s sluggish economy and inspire confidence in reform efforts. While a softer pound will make imports more expensive and could stoke inflation, analysts say it will also make the economy more competitive, boost exports and ease pressure on foreign reserves in the Arab world’s largest country.
More flexible exchange rates will meet an important precondition for pledged financial assistance from international financial institutions in support of the balance of payments, UBS Warburg said in its daily emerging markets note. International rating agencies Fitch Ratings and Standard & Poor’s welcomed the free float. Fitch said it alleviated a major concern about management of Egyptian economic policy provided the system worked efficiently, while S&P said the move supported its rating on the sovereign. "Regardless of the rate level, it is obvious that this is a very, very important step toward a freer economy. I believe it is a leap forward...It should attract interest in the Egyptian market," Hassan Abdalla, managing director of Arab African International Bank, told Reuters.
A key question is how clean the float will be. Some analysts warned the pound could fall sharply without central bank support, given strong pent-up demand for dollars.
Trade was slow all day, with banks quoting steady bid/offer spreads of 5.28/5.30 to 5.39/5.50 to the dollar. The general weighted average midrate at close was 5.3951.
Before the free float, the pound had only been allowed to trade three percent above and below a core rate of 4.51, with a weakest permitted rate of 4.6453 — which had been the standard rate at banks. Black market levels had hovered around 5.30-5.38.
The range of 5.28-5.50 quoted by banks is a 14.6-18 percent decline from that core rate, and a 12-15.5 percent fall from the weakest previously allowed rate.
Finance Minister Medhat Hassanein told Reuters in an interview that the flotation would benefit the economy overall, encouraging growth, tourism, foreign direct investment and stability. He added that state subsidies for key foodstuffs would be raised to compensate for the effect of the free float.
Doha Mounir, Hassanein’s economic adviser, said the forex move was part of a package which included customs, tax, budgetary and state procurement reforms.
Meanwhile, the International Monetary Fund (IMF) and the World Bank welcomed Egypt’s decision to float its currency yesterday. "In my opinion, it’s a very good decision, very timely, it should help the country, the market, the economy," the IMF representative in Egypt, Nadeem Ul-Haq, told AFP.
"By making (foreign) currencies available at the right price, companies can transact freely ... This will stimulate investments because when there is clarity, people are willing to invest," he added.
Mahmood Ayub, the Cairo-based World Bank director for Egypt, Yemen and Djibouti, told the official MENA news agency the flotation "will alleviate pressure on the pound ... and will reactivate the economy." (Agencies)