Egypt Shocks Markets With A Currency Devaluation, Other African Nations Might Follow

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Written by Kevin Mwanza

Listed stocks at the Egypt’s Cairo exchange surged as much as five percent on Monday after the country’s central bank surprised markets with a currency devaluation to end a shortage in foreign exchange and lure foreign investors.

Cairo’s main share index jumped 5.3 percent after the banking regulator said it had devalued the Egyptian pound by about 13 percent  to 8.85 per US dollar at a foreign exchange auction, from a previous bid price of 7.73.

Reuters reported that financial and real estate stocks, which are expected to benefit first from the devaluation, led the bull run.

Analysts said the currency devaluation made Egyptian stocks look cheaper for investors and led to increased demand.

Egypt has been facing a dollar shortage that has strangled businesses and restricted the country’s capacity to import essential goods include food stuff and fuel.

The move “is a positive step and should help to improve the country’s balance of payments position,” Jason Tuvey, Middle East economist at London-based Capital Economics, told the Wall Street Journal.

The Central Bank of Egypt said it would adopt a more flexible exchange -rate policy as it seeks to ease the acute dollar shortage that is hurting the North African economy.

“These decisions will result in exchange rates that will mirror the real value and strength of the local currency in a short period of time,” the central bank said in a statement.

A Financial Times report said other African central banks, including Nigeria where foreign exchange restrictions have caused a dollar shortage too,  could follow Egypt in devaluing their currencies.

Nigeria’s President Muhammadu Buhari and his finance minister have on several occasions said there was no need to devalue their naira and stuck to their guns against such a move that’s even supported by the International Monetary Fund (IMF)

“These countries can’t put off an adjustment in their currency any more. I know it can be painful, and we know there will be pressure on inflation, but a liberalized FX policy is the right way to go,” Luis Costa, a currencies analyst at Citigroup in London, told Financial Times.