{"id":97692,"date":"2016-11-03T08:24:26","date_gmt":"2016-11-03T12:24:26","guid":{"rendered":"http:\/\/countingpips.com\/?p=97692"},"modified":"2016-11-03T09:52:51","modified_gmt":"2016-11-03T13:52:51","slug":"egypt-liberalizes-fx-market-raises-key-rate-300-bps","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/11\/egypt-liberalizes-fx-market-raises-key-rate-300-bps\/","title":{"rendered":"Egypt liberalizes FX market, raises key rate 300 bps"},"content":{"rendered":"
November 3, 2016<\/div>
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By CentralBankNews.info<\/u><\/a>
\n    Egypt’s central bank liberalized its foreign exchange market, with immediate effect, and raised its key policy rate by 300 basis points as part of a major reform program aimed at tackling persistent shortages of foreign currency and making the country’s economy more internationally competitive.
    In a surprise announcement, the Central Bank of Egypt (CBE) said it had set a non-binding foreign exchange rate to “serve as soft guidance to jumpstart the market,” abolished its list of priority imports, will allow banks to operate until 9 p.m. every day to conduct foreign exchange transactions, and will hold multiple auctions to support the process of price formation.
    Banks will be at liberty to quote and trade at any exchange rate and the central bank will use the prevailing market rate for its transactions, the CBE said.
    By raising its key policy rate by 300 basis points to 14.75 percent, the CBE has now raised its rate by 550 points this year to tackle rising inflation and ensure price stability, its main objective.
    “For this purpose, the CBE will closely monitor the amount of reserve money in the system and continue to rely on indirect monetary policy tools,” the CBE said, adding that it will introduce deposit auctions with longer maturities at market rates.
    In addition, the CBE said it had also agreed with the finance ministry to “gradually phase out the monetary financing of the budget deficit over the coming months,” a move that is consistent with the government’s efforts to lower the budget deficit and debt.
    “The CBE will continue to monitor all economic developments and will stand ready to mobilize all tools in order to ensure price stability,” the central bank said.
    Egypt’s inflation rate eased to 14.1 percent in September from a 2016-high of 15.5 percent in August as the government implemented reform measures, such as a cut to energy subsidies and a Value-Added-Tax (VAT).
    The central bank already devalued the Egyptian pound by almost 14 percent in March to create a more favorable investment climate and attract capital flows in an effort to relieve years of foreign currency shortgage.
    Today the pound was trading at 8.896 to the U.S. dollar, down only around 1 percent from around 8.8 prior to its announcement and around the level it has been trading at since March.
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    The Central Bank of Egypt issued the following statement:<\/p>\n

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“In its mandate, the Central Bank of Egypt (CBE) takes all necessary measures in order to safeguard the Egyptian economy by ensuring monetary and financial stability. Accordingly, citizen centric measures are put in place to uphold price stability over the medium term while supporting economic development, fostering job growth, reinforcing the banking sector, and shoring up confidence in the local economy. <\/span>

<\/span> As part of the comprehensive home grown reform program, backed by the support of the international community, aimed to address the current macroeconomic and structural imbalances that weigh on the Egyptian economy, the CBE hereby announces its decision to move, with immediate effect, to a liberalized exchange rate regime in order to quell any distortions in the domestic foreign currency market. This move will allow market demand and supply dynamics to work effectively in order to create an environment of reliable and sustainable provision of foreign currency. <\/span>

<\/span> To this end, the following measures have been enacted: <\/span>

<\/span> \uf0a7 <\/span>The CBE has announced a nonbinding foreign exchange rate which is to serve as soft guidance to jumpstart the market. The new regime <\/span>will improve Egypt\u2019s competiveness <\/span>and allow for the deepening of foreign currency liquidity while streamlining activity into the formal channels. Such activity will allow for the steady accumulation of foreign currency reserves through channels which include but are not limited to the increase of private transfers, trade competitiveness, and foreign investments. <\/span>

<\/span>    \uf0a7 <\/span>The priority imports list has been abolished.<\/span>
             <\/span>\uf0a7  <\/span>Banks will be allowed to operate until 9PM every day, including Friday and Saturday, for <\/span>foreign exchange transactions and transfers only.<\/span>
              <\/span>\uf0a7  <\/span>The CBE will continue to monitor market activity and hold multiple price auctions when <\/span>deemed necessary. The purpose of these auctions will be to support the process of market price formation in the early days of adjustment.<\/span><\/p>\n