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Egypt Liberalize its Currency’s Exchange Rate

Guiding Principle
In a press release dated November 3rd, 2016, the Central Bank of Egypt (CBE) announced its decision to move, with immediate effect, to a liberalized exchange rate regime in order to quell any distortions in the domestic Forex market.As per the decision, banks and other market participants are at liberty to quote and trade at any exchange rate. Bid and ask exchange rates will be determined by demand and supply. The banks were obliged to deal with the rates set by the CBE prior to this decision. The CBE will use the prevailing market rate for any transactions it undertakes as per the new decision.

This move represents a part of the reform plan that the country undertakes as it secured the approval of the International Monetary Fund’s (IMF) for the three-years, $12bn loan agreement. It came also to terminate the parallel “black” market in the country and restore trading Forex within legal channels.

The CBE expects that its decision will allow market demand and supply dynamics to work effectively creating an environment of reliable and sustainable provision of foreign currency.

A. Foreign Currencies Shortage in Egypt
The Egyptian economy has been suffering from the turmoil followed the ousting of the Egyptian President Hosni Mubarak in 2011. The turmoil affected dramatically the number of tourists arriving to Egypt. In parallel, the foreign investment dropped sharply to unprecedented levels. Such reductions caused a major shortage at the foreign currencies in the country.

On the other hand, the Central Bank of Egypt (CBE) continued its policy of controlling the exchange rate of the Egyptian Pound. Rationing its cash in a rate that does not commensurate with the volume of demand for the foreign currency.

The policy of the CBE caused a lower competitiveness, reduction of foreign reserves, and foreign exchange crisis, which in turn has affected investments. The ration of the Egyptian Pound in unrealistic rate resulted also in the emergence of a black market selling foreign currencies with much higher rates than the banks to fulfil the needs of small and big businesses in the country.

B. Devaluating the Egyptian Pound
The high budget deficit and public debts resulting from weak revenues, large subsidy bills forced the Government to start negation with the International Monetary Fund (IMF) for a loan.

On November 11, 2016 Egypt successfully secured the IMF approval for a three-year, $12bn loan agreement. The first instalment of $2.75m was received following the IMF executive board’s approval. The loan payment will be over a 10-year period with an interest rate of 1-1.5%.

The loan was granted to Egypt after it undertaken to implement a reform plan for securing the approval of the IMF over the loan agreement.

Egypt had already started implementing the plan by to liberalize the exchange rate for the Egyptian Pound few days before the IMF announced its approval to grant the loan.

The CBE floated the currency, moving it from EGP 8.83 to the US dollar to about EGP 13 on November 3rd, 2016. The decision is expected to improve Egypt’s competitiveness, increase attractiveness to foreign direct investments, as well as helping exports and tourism, it is expected also give the CBE the chance to rebuild Egypt’s international reserves.

January, 2017 Hany Kenawi
Meyer-Reumann & Partners, Alexandria Office
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