by Mahmoud Fouly
CAIRO, Nov. 3 (Xinhua) -- The devaluation of the Egyptian pound is a step in the right direction to limit the hike and shortage of the U.S. dollar, boost foreign investments and meet a key demand of the International Monetary Fund (IMF) to provide a 12-billion-dollar loan to the Arab country, said Egyptian financial and economic experts.
The Central Bank of Egypt (CBE) announced on Thursday devaluation of the local currency by 48 percent which would allow the pound to float in the financial market based on offer and demand for the dollar.
INVESTMENT PUSH
"The decision is 100 percent right. It is the first decision to be decisively made to treat a defective monetary policy among other complementary decisions to fix the financial market," said Mohamed Farid, former EGX vice-chairman and head of Dcode Economic and Financial Consulting Company.
Recession over the past five years of political turmoil hit the country's main foreign currency resources including tourism, foreign investments and exports, which led to a huge hike in dollar price and a wide gap between its official and black market exchange rates, affecting many import-based businesses.
"Today's move puts an end to the black market as it makes dollars available in the banks with a competitive price, which is expected to refresh the import-based industries and businesses and attract foreign investments into the country," Farid told Xinhua.
He continued that the devaluation makes the currency a tool not a goal and it will help boost economy by urging closed or reduced businesses to reopen or increase production.
"It will also make foreign investors think purely about investment chances rather than how to get in and out Egypt amid two currency markets," the financial expert explained.
After raising the official exchange rate of the dollar from 8.8 pounds to over 13 pounds, subjecting the dollar price to offer and demand mechanisms is expected to make investors confident while planning to invest in Egypt without worrying about their funds.
"This will surely have a positive effect on investment as well as the stock exchange market in Egypt, because foreign investors will be encouraged by the liberty to enter the Egyptian market with an actual rate for the foreign currency," said Mohamed Youssef, Director of Egyptian Businessmen Association.
Youssef urged a series of other measures to improve investment climate including structural reforms such as amendments in the investment-related legislations, issuance of the new anti-bureaucracy investment law and offering more foreign investment incentives.
IMF DEMAND
Egypt has been struggling to survive severe economic recession that led to a decline in foreign currency reserves, a growing budget deficit to reach 339.5 billion Egyptian pounds (about 24.6 billion U.S. dollars according to new rates), which represents 12.2 percent of the gross domestic product, and rising foreign debts to recently reach 55.8 billion dollars.
The situation led the country to resort to a 12 billion dollar loan from the International Monetary Fund (IMF) whose initial agreement has been reached in August, and it is expected to be accompanied by some economic reforms including fuel and energy subsidy cuts.
"We have communicated with the IMF and we received positive reactions to our economic measures," said CBE Governor Tarek Amer in a press conference Thursday, stressing Egypt consulted the world financial institution "to put the Egyptian economy on the path of confidence."
Meanwhile, the IMF welcomed in a statement the CBE's decision to float the Egyptian pound and said it would "boost competitiveness and attract foreign investment."
"We welcome the Central Bank of Egypt's decision to liberalize the foreign exchange system and adopt a flexible rate regime," said Chris Jarvis, chief of IMF mission for Egypt, in the statement.
Samir Radwan, Egyptian former finance minister, said that the pound floatation move is "an expected important move that should have been made earlier," stressing it must be followed by other measures to ensure sufficient dollar reserves and prevent the dollar exchange rate from soaring once again.
"The IMF deal should be urgently finalized and Egypt should get four billion dollars as the first patch of the loan as soon as possible to maintain steadiness of the currency exchange rate," Radwan told Xinhua.
Radwan argued that the Egyptian economy suffered "a heart attack" for five years and it needs to be refreshed through increasing local production and encouraging dollar resources including tourism, the Suez Canal revenues and the remittances of Egyptian expatriates.
