“WE ARE in the bottleneck and we are on our way out, but if we want to get out, we have to take tough decisions,” says Abdel-Fattah al-Sisi, the president of Egypt. In the face of a growing economic crisis, the government has indeed made some difficult calls, such as implementing a value-added tax (VAT) to shore up state finances. Cuts to generous subsidies are expected. And on November 3rd it made its toughest decision yet: to allow a big devaluation of the Egyptian pound.
For months the official exchange rate sat at 8.88 pounds to the dollar, while black-market traders sold the greenback at a premium that reached 100%. An overly cautious devaluation in March provided only temporary relief. This time the government went further, letting the pound fall to about 13 against the dollar. The precise rate will be based according to demand after a central-bank auction of dollars “This is a more realistic level, putting the currency below the long-term average on the basis of real exchange rates,” says Simon Kitchen of EFG Hermes, a Cairo-based investment bank. The central bank also raised key interest rates by 300 basis points.
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