Egypt to Approach IMF in Days as Free Currency Trade Debuts

(Bloomberg) -- Egypt will ask the International Monetary Fund’s executive board within a day or two to consider its $12 billion loan request, Finance Minister Amr El-Garhy said, after the central bank freed the pound’s exchange rate to help spur investments and ease a dollar crunch.

The push to finalize the loan comes as Egyptian banks began freely trading foreign exchange on the interbank market this week for the first time. The pound weakened 3.6 percent on Monday to 16.75 per dollar at the National Bank of Egypt, the country’s largest lender. The currency has lost nearly 50 percent of its value since it was floated on November 3.

A total of $15.8 million changed hands on Sunday -- a level which was “low but expected given that banks have been starved of foreign currency for such a long time,” according to Reham ElDesoki, senior economist with Dubai-based Arqaam Capital. Volumes “should go up with time,” she said. “The central bank will probably wait and see how the system works in terms of self financing” before deciding whether to inject liquidity into the market.

Attention now turns to the IMF, which had tied the loan’s final approval to Egypt liberalizing its exchange rate and cutting energy subsidies, both carried out last week. Egypt sees the accord as key to shoring up investor confidence in an economy that’s struggled since the 2011 ouster of then-President Hosni Mubarak. Economists have said the measures could stoke inflation that for months has been at its highest level this decade.

Egypt’s benchmark EGX 30 index of stocks jumped 5.3 percent as of 2:15 p.m. in Cairo, extending its rally for an eighth day -- the longest since March. The pound’s 12-month non-deliverable forwards plunged 8.6 percent to 18.3 per dollar.

Arab Monarchies

With tourists deterred by an Islamist insurgency in the country’s Eastern Sinai, Egypt has relied on billions of dollars of aid from Gulf monarchies since the removal of Mubarak. The support has dwindled amid the drop in oil prices, prompting the government to turn to the IMF for help.

Removing the fixed exchange rate represented a major step for the central bank as it struggled to reel in a black market where the dollar was trading at almost twice its official rate. The spread between the two rates, coupled with the shortage of hard currency, had suppressed business. The regulator also raised key interest rates 300 basis points. After the flotation, the pound slipped by as much as 45 percent.

The flotation carries an inflationary risk -- one further augmented by the government’s announcement hours later that it was raising fuel prices by as much as 47 percent effective Nov. 4. The step further frustrated many in the nation of more than 90 million who have been grappling with price increases and shortages in some key commodities such as sugar.

--With assistance from Tarek El-Tablawy

To contact the reporters on this story:
Abdel Latif Wahba in Cairo at alatifwahba@bloomberg.net
Ahmed Feteha in Cairo at afeteha@bloomberg.net

To contact the editors responsible for this story:
Alaa Shahine at asalha@bloomberg.net
Stuart Biggs