Egypt took the dramatic step of allowing its currency to trade freely as it announced measures to stabilise an economy crippled by a dollar shortage that has raised concern about social unrest.
Stocks jumped the most in eight years and the pound slumped after the central bank’s decisions, which included raising its two benchmark overnight interest rates by three percentage points. They came after months of negotiations with the International Monetary Fund over a $12bn loan that’s seen as crucial in western capitals to preventing an economic meltdown that could destabilise the most populous Arab country.
“It’s a historic move for Egypt,” said Hisham Ezz al-Arab, chairman of Commercial International Bank Egypt, the country’s biggest lender listed on the stock exchange. He spoke after a meeting of top bank executives with the central bank. “It proves the government is serious about the reform.”
Egypt has struggled to revive its economy since the 2011 uprising that ended Hosni Mubarak’s three-decade autocratic rule and the ouster of his Islamist successor two years later. While the measures are expected to be followed by reducing energy subsidies – steps that will all but seal the IMF bailout – President Abdel-Fattah al-Sisi now has to manage the immediate fallout on a population facing the highest level of inflation in at least seven years.
Foreign-currency reserves have stabilised this year, though remain more than 40% below their Mubarak-era levels. The shortage led to the emergence of a black market for the dollar, with the gap between the official and parallel rate reaching as much as 100%. The crisis also curbed imports, causing shortages in commodities such as sugar.
“In the short term, the weakening of the pound will inevitably involve some short-term pain,” Capital Economics wrote in a report, noting that every 10% drop in the currency will cause inflation to accelerate by as much as two percentage points. “Nonetheless, a devaluation could bring substantial benefits in the long-run.”
Reacting to the announcement, investors and analysts said a key measure of success would be whether banks could provide enough dollars to meet pent-up demand.
“In the short term we will have to see the banks ability to make dollars available,” said Mohamed El Damaty, vice chief executive officer of Egyptian food producer Arabian Food Industries.
With investors and tourists staying away, Egypt has relied on billions of dollars of aid from its Gulf allies since the ouster of Mubarak. The support has dwindled amid the drop in oil prices, prompting the government to turn to the IMF for help.
The central bank said its decision to immediately liberalise the exchange rate is part of Egypt’s “home-grown reform programme, backed by the support of the international community.”
Policymakers set a tentative exchange rate of 13 pounds per dollar, plus or minus 10%, until it holds an auction at 1pm local time. The currency will float freely after the sale, according to two bankers familiar with the decision.
“We’ve been expecting this for a long time, and it is very positive,” Rami Sidani, head of frontier investments at Schroders in Dubai, said by phone. “We expect a lot of interest in Egypt, it’s a massive economy that has been put on hold for years.”
Tariq Qaqish, the Dubai-based head of asset management at Al Mal Capital, said the decisions won’t necessarily trigger major foreign investments immediately.

Reform seen driving up fuel costs
Egypt, which relies on imports to meets its energy needs, faces higher costs for gasoline and other oil products unless it cuts fuel subsidies after the government decided to float its currency, according to analysts at Petroleum Policy Intelligence and KBC Energy Economics, Bloomberg reported.
The Arab world’s most populous country took the unprecedented step yesterday of allowing the pound to trade freely as a step toward stabilising an economy weakened by a dollar shortage. Egypt spends as much as 10% of its annual gross domestic product on subsidies, with fuel subsidies accounting for two-thirds of that amount, according to Mark Bohlund, a Bloomberg Intelligence economist.
The country was already scrambling to meet its energy needs after Saudi Arabia’s state oil company halted shipments of refined oil products for October. Egypt signed a memorandum of understanding to import crude oil from Azerbaijan’s state oil company Socar to supply its refineries, the oil ministry said yesterday. The deal came after Egypt reached an agreement with Iraq on October 31 to form joint ventures to produce oil and natural gas.
“The government will have to move quickly to cut energy subsidies, otherwise they will be facing a very high bill for energy and other imported goods, as well as a large deficit,’’ Bill Farren-Price, chief executive officer at Winchester, UK-based consultant Petroleum Policy Intelligence, said in a phone interview.
Egypt has imported $8.6bn of fuel under the 2015-2016 annual budget. That’s the equivalent of 76bn Egyptian pounds at the old, official exchange rate, or roughly 120bn Egyptian pounds after yesterday’s decision to let the currency float.
“The floating complicates the situation for Egypt which is already having problems securing its needs after Saudi Arabia’s suspension of fuel supplies,’’ said London-based Ehsan Ul-Haq, senior oil-market analyst at KBC Energy Economics.
Saudi Arabian Oil Co, known as Saudi Aramco, informed the Egyptian General Petroleum Corp in early October that it would halt supplies of refined oil products, forcing Egypt to resort to tenders to meet domestic demand. Aramco had agreed earlier this year to provide Egypt with 700,000 tonnes of refined oil products per month for five years in an arrangement valued at about $20bn.
“It will be very difficult for the government to digest the whole thing itself,” Ul-Haq said of the expected increase in costs for imported fuel.