The Egyptian Central Bank Devalues Currency Against US Dollar, Mulls For Raising Benchmark Rates

March 15
5:53 AM 2016

The Egyptian central bank, through a surprise move has devalued its currency by almost 13% while declaring for adopting more flexible exchange rate policy on Monday. The moves have been aimed to ease the crunch for foreign currency which is hampering growth in the most populous Arab country.

The regulator has sold $198.1 million to local lenders at 8.85 pounds per dollar, compared to a previous exchange rate of 7.73 pounds. The decision is expected to help in assessing real value of the local currency in a short span of time, reports Bloomberg quoting Tarek Amer, Governor of the Egyptian central bank.

Markets have welcomed the move while the EGX 30 benchmark index has been witnessed to rise 6.4%. Economists have earlier suggested for the move to spare the Treasury from spending badly needed foreign currency to prop up the Egyptian pound, according to a report published in ABC News.

Cairo's main index has jumped 2.9% within the first 15 minutes of trade since the news hit the market. Foreign investors have resumed to exhibit more interest in Egyptian shares in recent days after remaining absent from the market earlier this year, reports Reuters.

However, Egyptian commoners have expressed their concerns since devaluation of local currency will cause a surge in prices of essential commodities, especially of imported goods. The price spiral is believed to add strain to the underperforming economy, struggling to recover since the ouster of longtime autocrat Hosni Mubarak in 2011.

The long overdue shift in policy stance has been welcomed by Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc. Egypt may have saved billions in reserves through adopting the measure 18 months ago, cites Simon. However, he expresses optimism on Egypt's ability to withstand the inflationary pressure caused due to currency devaluation.

Amer has taken the lead of the central bank in November ahead of growing concerns centering currency policy. However, policy makers have been refrained from depreciating the local currency fearing surge in consumer prices.

Inflation has been recorded 9.1% in February which is the lowest during the last six months. Following the inflationary trend, the Egyptian central bank is probably going to raise interest rates by 50 basis points to 9.75% on March 17, cites a median estimate of five economists surveyed by Bloomberg.

Egyptian economy has been tumbling since ouster of the autocratic ruler Hosni Mubarak in 2011. Following widespread calls from different quarters, Egyptian central bank has announced devaluation of its currency against US Dollar. Since the inflation is at the lowest level for the last couple of months, the central bank also considers for raising its benchmark rates on March 17.

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