The Central Bank of Egypt has recently floated the Egyptian pound. Riccardo Bicciato (Cairo-based local partner) and Omar Meabed (Head of Corporate and M&A at Kosheri, Rashed & Riad – BonelliErede’s exclusive legal partner in Egypt) comment on this landmark decision.
In application of the latest economic reform policy in Egypt, the Central Bank of Egypt devaluated the Egyptian pound (EGP) to fix the problems that controlled the foreign exchange rates and the supply and demand for foreign currencies. According to the powers vested in the Central Bank’s Law No. 88 for the year 2003 as amended by Laws No. 162 for the year 2004 & Law No. 93 for the year 2005 and its executive regulations, the Bank issued a circular on November 3rd 2016 regarding exchange rates free float, which lead to the devaluation of the Egyptian currency against other foreign currencies. The immediate result was the depreciation of the EGP by nearly 50 per cent against the USD based on the official pegging rate of EGP 8.88 per USD. The EGP remained volatile in the following weeks, with recorded trades ranging between EGP 15 and 18 per USD.
This opening of the gate for foreign currencies to float freely against the EGP (with rates set based on the market forces) might finally bring an end to the currency crisis that has hindered investment inflows and importation whilst simultaneously promoting black market currency exchanges with premiums even reaching 100 per cent.
The free float was a pre-requisite to obtain approval from the IMF’s Executive Board for the USD 12bn extended fund facility requested by the Egyptian authorities. Other pre-requisites already completed include: the promulgation of VAT Law No. 67 for the year 2016 (which entered into force on 8 September), Civil Service Law No. 81 for the year 2016, the cuts in energy subsidies on electricity and oil products (which were introduced on 8 August and 4 November, respectively). Approval was granted on 11 November, with an initial tranche of USD 2.75bn immediately being disbursed to support the Egyptian authorities’ efforts to redirect the economy towards the right path.
The free floating of the EGP will also certainly bring substantial short-, mid- and long-term benefits that will lead to economic development and more investments in Egypt.
First, the depreciation of the EGP makes the Egyptian market more captive. In particular, the expected decrease in domestic costs of operation and production may result in an increased FDI either through investments to establish new businesses or acquisitions of existing ones.
Second, with the expected inflows of foreign currencies through financial facilities, Eurobonds, and FDI, investors will again be able to transfer their profits abroad.
Third, the significant decline in costs will increase the competitiveness of Egyptian products in international markets and, thus, boost exportation possibilities.
The liberalisation of the EGP exchange rate marks a historical moment for the Egyptian economy after years of official pegging creating deficiencies. It will also create a healthier investment climate, where foreigners can develop their investments and generate profits.