Egypt has devalued its currency by 48 percent, meeting an important demand set by the International Monetary Fund in exchange for a $13bn loan over three years to overhaul the country’s economy.
Thursday’s much anticipated decision by the Egyptian Central Bank to devalue the pound followed a sharp and sudden decline this week in the value of the dollar in the unofficial market, dropping from an all-time high of 18.25 pounds to around 13 to the US currency.
The devaluation pegs the Egyptian pound at 13 to the dollar, up from nearly nine pounds on the official market.
The IMF’s executive board has yet to ratify the $12bn loan provisionally agreed by Egypt and the IMF in August.
Egypt’s central bank increased interest rates by three percent to rebalance currency markets following weeks of turbulence.
A shortage of dollars in the economy had put the currency under intense downward pressure in recent months.
A rapid slide on the black market to 18 earlier this week pushed the importers to cease buying, with the rate strengthening to 13 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.
“The CBE 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.”
Bankers told Reuters news agency they had been informed that the central bank would set an initial guidance rate of 13 pounds to the dollar and 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 1pm local time (11:00 GMT).
After the results of the auction are announced the band would be removed, according to a central bank memo that was sent to banks earlier on Thursday and seen by Reuters.
The central bank said the new exchange rate was non-binding and would serve as “soft guidance to jumpstart the market”.
It was not clear how much foreign exchange would be offered at Thursday’s exceptional sale.
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 9pm local time every day, including weekends, for foreign exchange transactions and transfers only.