Egypt for more flexible exchange rate policy

CAIRO: Egypt´s central bank devalued the pound on Monday and said it would move to a more flexible exchange rate policy 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 imbalances in the exchange rate system and restore the circulation of foreign currency inside the banking system in an orderly way," it said in an extensive statement.

It did not explain how the new approach would work but said it expected to rebuild foreign currency reserves to $25 billion by year-end from about $16.5 billion now.

Economists said the moves would encourage foreign investment in Egyptian stocks and treasuries, which have seen an exodus of foreign money in recent years.

"This is great news.

You´ve made my day," said Hany Genena, head of equity research at Beltone Financial, who had long predicted a shift to a more flexible exchange rate.

Cairo´s main stock index was up 5.4 percent by 0937 GMT.

Egypt, heavily dependent on imports, has been short of foreign currency since a 2011 uprising ended Hosni Mubarak´s 30-year rule, scaring off foreign investors and tourists.

Since then, reserves have more than halved, weighing on the pound.

But with tens of millions living in poverty, the central bank had been reluctant to devalue for fear of sparking inflation.

A black market in dollars boomed, which then-central bank governor Hisham Ramez tried to stifle in February 2015, by restricting deposits and withdrawals of foreign currency.

But the move only exacerbated the dollar shortage, making it hard for firms to clear imports, which piled up at ports, while factory output was disrupted by a lack of imported components.

The gap between the official and black market rates widened to unprecedented levels.

Having fallen to almost 10 to the dollar in recent weeks, the pound´s black market rate was back closer to the official rate on Monday.

Two black market traders told Reuters they would now sell dollars at around 9 pounds.  They did not give figures for the volumes of trade.