CAIRO (AP) — Egypt devalued its currency by 48 percent on Thursday and announced the pound would be allowed to float — measures that meet a key demand by the International Monetary Fund in exchange for a $12 billion loan over three years to overhaul the country’s ailing economy.
The devaluation pegged the Egyptian pound at 13 to the US dollar, up from 8.8 pounds on the official market.
A Central Bank foreign currency auction was scheduled for later, according to the official MENA news agency. By the afternoon, banks sold the dollar, the most sought after hard currency in Egypt, for 14.30 pounds and bought it for just 13.
The flotation, which is virtually certain to cause a steep hike in prices, piling up pressure on President Abdel-Fattah el-Sissi’s government to avoid a popular backlash against its handling of the economy.
Sissi has repeatedly urged Egyptians in recent weeks to rally behind him as he grapples with the country’s worst economic crisis in decades, arguing that there was no way out of the economic crisis unless Egyptians “endure and be patient.”
Sissi, a general-turned-president elected in 2014, has pledged to do all he can to protect Egypt’s poor from the inflationary fallout that is certain to come with economic reforms. Last week, he said the military would distribute a one-off package of basic food items such as sugar and rice at half price among poor Egyptians.
Also Thursday, the Central Bank raised by three percentage points its two key overnight interest rates.
The bank said the measures were part of the government’s reform program and designed to “completely end” the unofficial — or black — currency market. The measures, it added, will “empower the Egyptian economy to face the present challenges, unleash its potential and achieve the hoped-for growth.”
“The flotation is an excellent, overdue step that, thank God, we took,” Egypt’s business tycoon Naguib Sawiris wrote on his Twitter account. “We must all help to make this step a success.”
Thursday’s much heralded Central Bank decision followed a sharp and sudden decline this week in the value of the dollar on the unofficial market, plunging from an all-time high of 18.25 pounds to the dollar to around 13.
The IMF’s executive board has yet to ratify the $12 billion loan provisionally agreed by Egypt and the lender-of-last-resort in August.
Chris Jarvis, the IMF mission chief in Egypt, welcomed the development, saying the pound’s flotation would enhance the country’s “external competitiveness, support exports and tourism and attract foreign investment.”
“All of this will help foster growth, job creation and stronger external position for the country,” he said in a statement.
Shares on the Egyptian stock market rallied on the back of Thursday’s measures, with the benchmark EGX30 index rising 3.35 percent by late afternoon.
Egypt is facing another painful must — it’s expected to reduce or lift altogether state subsidies on fuel to meet IMF conditions. It has already reduced subsidies on household electricity and hiked by 40% the price of sugar for ration card holders.
Seeking to calm nerves at a time of economic tumult, the Central Bank said it guarantees bank deposits in all currencies and that individuals and companies would face no restrictions on depositing and withdrawing foreign currency. Regulations governing importers of non-essential goods would remain in place, it added.
Banks would be allowed to operate until 9 p.m. and open on weekends to buy and sell foreign currency, it added. Banks in Egypt are normally open to the public until 5 p.m. and close on the Friday-Saturday weekend.
Thursday’s developments came just two days after the Federation of the Chambers of Commerce inflicted a blow to the unofficial currency market, announcing a two-week freeze in dealing with black market currency traders and curtailing the imports of non-essential goods for three months.
On Tuesday, the Supreme Investment Council, a newly formed body led by Sissi, approved a package of measures designed to spur the economy, including a three-year freeze on taxing capital gains on stocks and an unspecified increase in the number of state-owned companies to be partially privatized.
Copyright 2016 The Associated Press.