Egypt devalues pound, announces flexible exchange rate policy

Egypt's central bank devalued the pound on Monday and said it would move to a more flexible exchange rate regime, in an effort to rebalance markets and ease a foreign exchange shortage that had stifled business activity and hit confidence. Egypt devalued the pound to 8.85 per dollar from 7.73 and simultaneously pumped nearly $200 million into the dollar-starved banking system in a surprise sale.

"The Central Bank of Egypt has decided to follow a more flexible policy with regard to the exchange rate, aiming to resolve distortions in the exchange rate system and restore the circulation of foreign currency inside the banking system in an orderly way," the bank said in an extensive statement. It did not explain how the new approach would work, but it vowed to rebuild forex reserves to $25 billion by the end of the year from $16.5 billion now and "maintain order in the currency market and stability in price levels in the medium term." Economists welcomed a move many said was overdue and would encourage foreign investment in Egyptian stocks and government bonds, from which foreign money has fled in recent years.

"It's a welcome, but long overdue shift in policy stance - Egypt could have saved billions in reserves if it had done this 18 months ago," said Simon Williams, chief economist for Central and Eastern Europe, Middle East and Africa at HSBC. "The question now is will they follow through - if the pound needs to weaken further, will they let it? Are the authorities ready to tolerate the rise in inflation this will inevitably bring?"