Cairo markets buoyed by floating pound

10 February 2003
The decision to fully liberalise the Egyptian currency exchange rate on 29 January has raised hopes of a fresh injection of foreign capital into the flagging economy, hopes that appear to be born out by the surge in activity on the local stock market in early February. The benchmark Hermes index rose by 12.7 per cent in four days to reach its highest level in two years, with trading volumes bolstered by strong interest from mutual funds in the US, Europe and the Gulf, according to local financial analysts (MEED 31:1:03).

'The two main reasons for the upturn are the catalyst shock of floating the currency, which has improved investor sentiment in Egypt, and the new foreign interest caused by the liberalisation,' says Philip Khoury of Cairo-based EFG-Hermes. 'Before, foreigners had to come into the market and exit it at the official exchange rate, but there were worries that if there was a devaluation of the pound in the meantime they would be forced to exit at the parallel, devalued rate and incur a loss. The lack of foreign interest meant that volumes were drying up to the tune of $4 million a day.'

The Central Bank of Egypt posted on 3 February its first foreign exchange figures since flotation, indicating a 16 per cent depreciation of the pound against the dollar. Most of the depreciation occurred on the first day of flotation, and bankers say the currency is expected to continue to fluctuate around the black market rate of $1=£E 5.40. A total of 57 banks have been licensed to deal in foreign currency.

The flotation of the pound brings an end to the managed peg system, which has seen the value of the pound fall by 24.6 per cent against the dollar in four successive devaluations since late 2000. The decline has accompanied a period of flat economic growth and a recession in the tourist industry, the country's main foreign currency earner. Foreign currency reserves fell to $14,000 million in October 2002 from a peak of $20,000 million in 1997.

Despite concerns over an inevitable rise in the price of imported goods and potential short-term inflationary pressure, the move has been broadly welcomed by international rating agencies, the IMF and the local financial community. Liberalisation of the exchange rate, it is hoped, will not only encourage foreign direct investment but also lead to a rise in exports with the introduction of a credible foreign exchange regime.

'The most interesting question raised by the move to a free float is whether we are seeing the start of a reformist wave of government policy,' says a report published by EFG-Hermes on 29 January. 'To date we have remained on the sidelines waiting for the authorities to start delivering. Today they did, with a bold move.'

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications