Egypt Free Floats Its Currency, Devaluing It Against the Dollar

(Wall Street Journal)- Egypt’s central bank said Thursday it would freely float the local currency, in a move aimed at eliminating a flourishing black market for dollars after the cash-strapped government secured loans to boost its reserves.

The National Bank of Egypt, the country’s biggest lender, said on its website that the dollar could be bought for 13 pounds and sold for 13.50 pounds each. This compares with the previous rate of around 8.88 Egyptian pounds to the dollar that the bank had maintained since March.

In making the announcement, Egypt’s central bank said “the decision to liberate exchange rates” intends to return the buying and selling of foreign currency to the banking sector in order “to better reflect supply and demand.”

The central bank also raised interest rates by 3 percentage points. It raised the overnight interest rate, overnight lending rate and the rate of the central bank’s operation to 14.75%, 15.75% and 15.25%, respectively. The discount rate was also raised by 3 percentage points to 15.25%, the statement said.

Years of political turbulence and an uptick in terrorism have hurt Egypt’s main sources of hard foreign currency—tourism and foreign direct investment. With foreign reserves falling, the country was forced to ration the dollars it had to pay for essentials such as wheat and medicines. This also pushed local businesses to turn to the black market to fulfill urgent needs for foreign currency.