On January 28, 2003, Egypt’s then-Prime Minister Atef Ebeid spoke in English to an annual roundtable organized by the Economist in Cairo, informing foreign investors and investment banks that his cabinet had decided to remove state support for the Egyptian pound.
“There will be free markets for currency exchange, the market will determine the exchange rate, and the banks will undertake the transactions,” Ebeid said.
On the same day, the governor of the Central Bank, Mahmoud Abu al-Oyoun, clarified that all banks working in Egypt would independently determine their own exchange rates.
This decision was preceded by several steps in 2001 and 2002 to decrease the value of the Egyptian pound against the dollar, and led to an increase in the exchange rate, from LE3.85 to LE4.51 to the dollar.
The decision to float the pound led to an increase in the official rate of LE5.861 to the dollar in 2003, and LE6.194 the following year, before it declined to LE5.791 in 2005, according to Ministry of Finance data.
The value of the dollar rapidly increased on the black market, exceeding LE7 by the middle of 2003, compared to an official value of LE6.
In March 2003, the government issued a decree obliging ministries, public agencies, public and private sector companies and individuals entitled to hard currency payments for their work, to sell 75 percent of their currency to the banks within a week. The decree also required they set aside 25 percent of their income in private accounts in national banks, to be retroactively enforced from the first of January.
In December 2003, Farouk al-Oqda replaced Abu al-Oyoun as governor of the Central Bank and the prime minister’s decree was withdrawn. The Central Bank increased the interest rate for borrowing and lending by 9 percent from January to July, to reach 13 percent, as a way of encouraging pound deposits and to control inflation rates. The increase of the interest rate led to an increase in the return of treasury bills, in an attempt to attract foreign investment.
How did the floating affect the economy?
A retreat in the value of the currency is usually associated with a hope for macro-economic improvements, particularly regarding attracting more foreign investment and increasing exports.
During the 2003 floating experiment, revenues from Egyptian exports increased to US$7.1 billion in the 2001-2 Fiscal Year, and then to $8.2 billion the following year, reaching $10.4 billion in 2003-4, an increase of 46 percent. But analysts don’t attribute this to the devaluing of the pound alone.
The global economy picked up in 2003 after a decline in 2001. World trade flourished and the global economy doubled its growth rate to 4.5 percent, compared to the previous year, according to Central Bank data.
Foreign Direct Investments also increased at a rate of 64 percent in 2001-2, to reach $700.6 billion dollars the following year. But this includes the selling of majority shares of some local companies to foreign investors at a cost of $439.7 million, according to the Central Bank’s 2002-3 report. The following year showed only $407.2 million of net outflow, decreasing to $225.6 million the year after.
How did the floating impact people’s lives?
After the pound was floated, annual inflation rates continued to increase month by month.
This graph shows inflation rates and their increase from 2.9 percent in January 2003, when the decision was made to float the pound, to 17.3 percent in December 2004. Data is from the monthly fiscal report by the Ministry of Finance in December 2006.
A 2007 study on the impact of the devaluation of the pound between 2000 and 2005 by the World Bank showed a decline in the consumption of Egyptian families to an average rate of 7.4 percent, leading to a 5.1 percent increase in the number of poor families, from 16.7 percent to 21.8 percent. The study also showed the impact of devaluation on food staples, which had its largest impact on Egypt’s poor.
Translated by Lina Attalah.