Egypt floats pound

The pound has been steadily slipping

Egypt has decided to allow free exchange of its currency, the pound, a move which should bring its street value and official value in line.

From today, there will be a free market for foreign exchange

Atef Obeid
Prime Minister

Banks and bureaux de change can only trade the Egyptian pound at rates within 3% of the government's valuation, set a year ago at 4.51 to the US dollar.

But although that was the seventh change totalling a near-25% devaluation since mid-2000, individuals can easily get a rate as high as 5.36, while many banks trade on the black market behind closed doors.

So after a meeting on Tuesday morning between members of the ruling National Democratic Party and bankers, Prime Minister Atef Obeid told a Cairo economic conference on Tuesday that a free float was to begin immediately.

"From today, there will be a free market for foreign exchange," he said. "The banks will play an active role in buying and selling."

In an interview with Dow Jones Newswires later on Tuesday, Central Bank chief Mahmoud el-Ayoun said a formal announcement to set the scheme in motion would follow on Wednesday.

Some banks have reportedly been allowed to trade above the official rate already, to relax the pressure on hard currency reserves.

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Egypt's economy has been in decline for some years, a trend exacerbated by the weak tourism market of recent years.

Attacks by Islamic fundamentalists on tourists in 1997 triggered the tourism crunch and a consequent shortage of hard currency.

Receipts from the Suez Canal, the country's second main source of foreign earnings, have also been disappointing, and look set to slide further should war start in Iraq.

The effect has been compounded by the traditional seasonal slide, as devout Muslims change their money into Saudi riyals for the Hajj, or pilgrimage to the holy city of Mecca in February.

Yet the government has been reluctant to relax its hold on the pound's exchange rate, fearing the impact the resulting inflation could have on its 67 million people.

It remains unclear whether the new system will retain limits on the rates banks and building societies are allowed to charge, but the main official rate for customs purposes is likely to become a trade-weighted average.