Standard & Poor's (S&P) said that the decision by the authorities in the Arab Republic of Egypt to float the exchange rate of the Egyptian pound supports its ratings on the sovereign.
"The fixed exchange rate regime for the Egyptian pound, which has finally been abandoned today, had long lost its credibility because it had been used to support an exchange rate that was out of line with market conditions and inconsistent with other economic policies," said S&P's credit analyst and Director for Sovereign Ratings in the Middle East and Africa, Ala'a Al-Yousuf.
As the banking system will need some time to overcome teething problems and create a well-functioning and transparent foreign exchange market, the exchange rate may overshoot its market-clearing rate in the short term. "However, the economy should benefit from a return of liquidity to the foreign exchange market, allowing the central bank to further lower interest rates," added Al-Yousuf. "This should stimulate growth, provided fiscal policy is not loosened at the same time. Otherwise, the exchange rate will be destabilized, inflation will rise, and growth will be jeopardized."
The timing of the free-float may be related to the pilgrimage season, when demand for foreign exchange hits a high point, but it will provide the central bank with essential flexibility to respond to an inevitable adverse impact on the economy in the event of a US-led war on Iraq. The free-float should also depoliticize the exchange rate, support the government's export-led growth strategy by increasing competitiveness, and facilitate imports of crucial intermediate and capital goods by making foreign exchange readily available. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
