© Reuters. FILE PHOTO: People wait on line to withdraw money from ATM machines at Banque Misr in Cairo, Egypt, March 6, 2024. REUTERS/Amr Abdallah Dalsh/File Photo

By Nafisa Eltahir

CAIRO (Reuters) -Egypt’s pound held steady on Thursday, a day after the central bank let the currency plunge and announced a shift to a more flexible exchange rate system as Cairo secured an expanded $8 billion programme with the International Monetary Fund.

The pound hovered in the same range around 49.5 to the dollar it had settled at near closing on Wednesday, LSEG data showed. Before Wednesday’s de-facto devaluation and a steep interest rate hike, the central bank had held the currency for about a year at just under 31 pounds to the dollar.

A more flexible exchange rate, long a key demand from the IMF, is seen as crucial for restoring investor confidence in an economy that has been hobbled for the last two years by a foreign currency shortage.

The shortage has curbed local business activity and led to backlogs at ports and delays in commodity payments.

Prime Minister Mostafa Madbouly said Egypt was planning on big deals to ensure liquidity and would work with merchants to stabilise prices and prioritise foreign currency access for basic commodity importers as the currency shift takes effect.

Egypt’s international bonds, which had soared on Wednesday before falling back, declined further on Thursday, with the 2033 note down 1.62 cents on the dollar to 81.81 cents, according to Tradeweb data.

Overall, Egypt’s sovereign bond prices were trading at early March levels.

‘ENOUGH AND MORE’

Egypt has promised a move to a more flexible exchange rate system in the past, only to resume holding the currency at a fixed rate, while much of the economy depended on a black market rate that fell as low as 70 pounds.

Central bank governor Hassan Abdalla described the black market trading as a “disease” that reflected a lack of trust in the financial system.

“Thankfully, I can stand here today and say we have enough to fulfil our obligations and more,” he told reporters at a rare press conference late on Wednesday.

The central bank would still have the ability to intervene, as in other countries, in the case of excess volatility, Abdalla said.

The IMF, which agreed to add $5 billion to its existing $3 billion loan programme with Egypt, has said it is looking for a sustainable and unified exchange rate that was determined by the market.

Under the programme, Egypt has committed to undertake structural reforms to stabilise prices, manage the debt burden and encourage private-sector growth.

Abdalla said that following a 600 basis point hike on Wednesday, Egyptian interest rates, long amongst the highest globally, would now be on a “downward track.”

‘IRON FIST’

The pound’s devaluation and the agreement with the IMF come two weeks after Egypt signed an investment deal with Emirati sovereign fund ADQ that includes $24 billion payment for rights to develop a prime stretch of Mediterranean coastline.

It also includes the conversion of $11 billion in existing deposits to be used for unspecified projects across Egypt. The Egyptian government said the total of $35 billion would be transferred within two months.

Since early 2022, when the foreign currency shortage worsened, the pound has now lost more than two thirds of its value against the dollar in a series of staggered devaluations.

The war in Gaza and attacks on Red Sea shipping have put at risk receipts from tourism and Suez Canal traffic, two other main sources of hard currency, though officials say tourist numbers rose at the start of this year.

Remittances from Egyptians working abroad, the country’s top single source of foreign currency, slowed sharply last year amid expectations that the pound would fall.

Madbouly said on Thursday that the interior ministry would use an “iron fist” against traders who were channelling remittances outside the banking system.