Egypt devalued its currency by 48 percent on Thursday and announced the pound would be allowed to float - measures that meet a key demand by the International Monetary Fund in exchange for a $12 billion loan over three years to overhaul the country's ailing economy.
The devaluation pegged the Egyptian pound at 13 to the dollar, up from nearly nine on the official market. A Central Bank auction of dollars will be held later Thursday, allowing supply and demand to determine the value of the pound for the first time in decades.
The devaluation was virtually certain to cause a steep hike in prices, piling up pressure on President Abdel-Fattah el-Sissi's government to avoid a popular backlash against its handling of the economy.
El-Sissi has repeatedly urged Egyptians in recent weeks to rally behind him as he grapples with the country's worst economic crisis in decades, arguing that there was no way out of the economic crisis unless Egyptian "endure and be patient."
El-Sissi, a general-turned-president elected in 2014, has pledged to do all he can to protect Egypt's poor from the inflationary fallout that is certain to come with economic reforms. Last week, he said the military would distribute a one-off package of basic food items such as sugar and rice at half price among poor Egyptians.
Also Thursday, the Central Bank raised by three percentage points its two key overnight interest rates.
The bank said the measures were part of the government's reform program and designed to "completely end" the unofficial - or black - currency market. The measures, it added, will "empower the Egyptian economy to face the present challenges, unleash its potential and achieve the hoped-for growth."
"The floatation is an excellent, overdue step that, thank God, we took it," Egypt's business tycoon Naguib Sawiris wrote on his Twitter account. "We must all help to make this step a success."
Thursday's much heralded Central Bank decision followed a sharp and sudden decline this week in the value of the dollar on the unofficial market, plunging from an all-time high of 18.25 pounds to around 13 to the U.S. currency.
The IMF's executive board has yet to ratify the $12 billion loan provisionally agreed by Egypt and the lender-of-last-resort in August.
Egypt is also facing another painful must - it's expected to reduce or lift altogether state subsidies on fuel to meet IMF conditions. It has already reduced subsidies on household electricity and hiked by 40 percent the price of sugar for ration card holders.
Seeking to calm nerves at a time of economic tumult, the Central Bank said it guarantees bank deposits in all currencies and that individuals and companies would face no restrictions in depositing and withdrawing foreign currency. Regulations governing importers of non-essential goods would remain in place, it added.
Banks would be allowed to operate until 9 p.m. and open on weekends to buy and sell foreign currency, it added. Banks in Egypt are normally open to the public until 5 p.m. and close on the Friday-Saturday weekend.
Thursday's developments came just two days after the association of the chambers of commerce inflicted a blow to the unofficial currency market, announcing a two-week freeze in dealing with black market currency traders and curtailing the imports of non-essential goods for three months.
On Tuesday, the Supreme Investment Council, a newly formed body led by el-Sissi, approved a package of measures designed to spur the economy, including a three-year freeze on taxing capital gains on stocks and an unspecified increase in the number of state-owned companies to be partially privatized.
IMF welcomes float
The International Monetary Fund (IMF) has welcomed Egypt’s decision to float its pound currency on Thursday, it said in a statement, adding that the decision would boost competitiveness and attract foreign investment.
“We welcome the Central Bank of Egypt’s decision to liberalise the foreign exchange system and adopt a flexible exchange rate regime,” said IMF Mission Chief for Egypt Chris Jarvis in a statement.
“This will make more foreign exchange available. The flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment.”