The Central Bank of Egypt (CBE) announced on Thursday that it would float the Egyptian pound, setting an initial guidance rate of EGP 13 to the US dollar.
The currency’s rate will ultimately be decided by the market’s forces of supply and demand.
The CBE also hiked interest rates by 300 basis points for “one night only” to re-balance currency markets, according to its press release.
The decision was surprising for experts who didn’t see it coming, although a devaluation of the Egyptian pound was imminent.
Abobakr Emam, the head of the research department in Prime bank, said that floating was expected after everything that has been going in the previous days, adding that the decision is a step in the right direction.
He believes that the decision is very important, adding that the decision is good for industry, which would buy the US dollar for approximately EGP 13 if banks allowed investors to exchange currencies freely.
It’s the most important thing for the CBE to meet the demand on foreign currencies from different sectors, Emam said, noting that it’s the only way to eliminate the black market.
However, Emam believes that the decision is aiming towards collecting currencies from the black market.
From another point of view, Omar El-Shenety, managing director at the Cairo-based investment bank Multiples Group, said that he wasn’t expecting the flotation to occur now, adding that he preferred controlled-floating that allows the Egyptian pound to lose some of its price against US dollar bit by bit.
He added that CBE governor Tarek Amer believes that leaving the price of US dollar to supply and demand forces would put an end to the black market.
El-Shenety sees that the black market will definitely be eliminated, but not as quickly as Amer thinks, explaining that banks cannot meet the demand of the market at the present time and will continue to obtain what it needs from the black market.
The decision’s impact will be measured in the coming days to see if it was right or wrong, he noted.