The Central Bank of Egypt has acted swiftly to deal with the latest crisis in the foreign exchange market through a 7.5 per cent devaluation of the Egyptian pound. Analysts say this prompt response and the assurance from the central bank that it will keep the market supplied with foreign exchange should ensure that the economy will stand a good chance of overcoming difficulties caused by a collapse in tourism income.
The central bank said on 13 December that the new central rate for the pound would be $1=£E 4.50. The rate has been $1=£E 4.15 since an earlier adjustment announced on 5 August. The trading band of plus-or-minus 3 per cent has been maintained. The central bank also said it would review the central rate at least on a weekly basis, and would support its exchange rate policy with 'some use of reserves'. Foreign exchange reserves totalled $14,800 million at the end of September, according to the most recent figures published by the central bank.
Prime Minister Atef Obeid on 12 December disclosed the plans to devalue, and said that the central bank would inject $500 million into the market immediately and a further $1,500 million over the next six months. He said these funds would come from bilateral donors and agencies such as the IMF, the Arab Monetary Fund and the Jeddah-based Islamic Development Bank.
Analysts say the decisive action on the exchange rate bears the hallmarks of the new approach to monetary policy evident since the end-October appointment of Mahmoud Abul-Ayoun as governor of the central bank. However, they emphasise that the key to the success of the measure will be flexibility over the coming period. Since the policy of a crawling peg was introduced at the start of 2001, there have been no regular adjustments of the central rate.
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