Egypt devalues currency to record low against dollar

AP News
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Posted: Mar 14, 2016 7:39 AM

CAIRO (AP) — Egypt's central bank devalued the pound to 8.85 per U.S. dollar from a previous 7.73 on Monday, state news agency MENA said, a move aimed at alleviating a foreign currency shortage that has fueled a black market and crippled businesses.

Markets welcomed the move, with the EGX 30 benchmark index rising 6.4 percent. Economists had said a devaluation was necessary to spare the Treasury from spending badly needed foreign currency to prop up the Egyptian pound.

Many Egyptians are worried, however, that the move will cause a surge in prices, especially for the multitude of imported goods. That would add to the strain of an underperforming economy that has yet to recover from years of turmoil since the 2011 ouster of longtime autocrat Hosni Mubarak.

"I think that the fear of inflation is exaggerated because already the market was pricing imported products at the parallel market price which has reached 9.80 last week, and remained for the most part of 2016 even higher than today's new exchange rate," said Hany Farahat of CI Capital investment bank.

Prices have been rising under the rule of President Abdel-Fattah el-Sissi, who as military chief led the ouster of Egypt's first elected leader, an Islamist whose chaotic rule fueled mass protests. El-Sissi cut fuel subsidies in 2014 by more than 70 percent, causing a public outcry but earning respect from economists, who saw it as a necessary step to save funds better used elsewhere.

Foreign reserves have been stable for months and stood at $16.5 billion in February, a far cry from the $36 billion level right before the January 2011 uprising, when tourism and its associated hard currency peaked.

Authorities had taken a number of moves to manage the foreign currency shortages, including capping the amount of dollars that could be deposited at local banks and limiting access to them to more essential businesses in the industrial and health sectors. The deposit and withdrawal limits have since been lifted.

MENA said the unscheduled auction was to sell $200 million to banks, the second such offering since last week, when the central bank made $500 million available. The rules allow banks a 0.10 pound band of leeway for trading, and after the auction the National Bank of Egypt said it would sell dollars at 8.95 pounds and buy them at 8.9 pounds.