Egypt announces shift towards floating exchange rate

3rd Nov 2016 09:03

(ShareCast News) - Egypt´s central bank announced its decision to switch towards a semi-floating exchange rate in a bid to alleviate a 'credit crunch' in the country.In parallel, the country´s monetary authority announced a 300 basis point hike in its main lending rates.The monetary authority "announces its decision to move, with immediate effect, to a liberalized exchange rate regime in order to quell any distortions in the domestic foreign currency market," a statement posted to the central bank´s website read."This move will allow market demand and supply dynamics to work effectively," the central bank added.Officials in Cairo set aninitial value of 13 Egyptian pounds per US dollar, plus or minus 10%.Thursday´s policy change would become effective following a central bank auction which was scheduled to take place at 1300 local time.Market observers highlighted that the move increased the chances of the International Monetary Fund making a three-year $12bn loan facility available to the North African country which was still attempting to recover from the impact of the Arab Sping and the political instability it resulted in, culminating in the removal from power first of Hosni Mubarak and then of the Muslim Brotherhood's Mohammed Morsi.A staff level agreement, which envisaged such a loan, was agreed on 11 August but was pending authorisation from the Fund's Board.Under the terms of an economic reform programme agreed with the Washington-based lender, Egypt's stock of general government debt was projected to decline from about 98% of gross domestic product in 2015/2016 to roughly 88% of GDP in 2018/2019.Among the measures agreed were: 1) approval of the country's budget; 2) an increase in the VAT rate; 3) a plan on energy subsidies; 4) and moves towards a flexible exchange rate.