Egypt raises energy prices hours after floating currency

Posted on November 4, 2016

Egypt will raise energy prices from Friday, the petroleum ministry said on Thursday, hours after the central bank floated the pound currency.

The move, which took effect at midnight local time (2200 GMT) on Thursday, comes as part of Egypt’s austerity measures aimed at securing a three-year, $12bn International Monetary Fund loan agreement.

The price of 92 octane gasoline will rise 34.6 per cent to 3.5 Egyptian pounds ($0.2258) from 2.6 pounds per litre while 80 octane gasoline will go up 46.8 per cent to 2.35 pounds from 1.6.

Diesel will rise to 2.35 pounds per litre, an increase of 30.5 per cent from 1.8. The less commonly used natural gas for vehicles will rise by 45.5 per cent to 1.6 pounds per cubic metre, up from 1.1 pounds.

It will be the second time Egypt has raised fuel prices in recent history. In 2014 it increased prices by up to 78 per cent to ease pressure on a swelling budget deficit.

The government said at the time it would eliminate fuel subsidies completely for five years but a fall in global oil prices had delayed a decision ever since. Food and energy subsidies traditionally eat up a quarter of Egyptian state spending.

On Thursday, Egypt devalued its currency by a third and allowed its pound to float freely.

The central bank devalued the pound by 32 per cent as it set a new official exchange rate of 13 to the US dollar compared with 8.88 previously. It also raised its benchmark interest rate by 300 basis points to 14.75 per cent.

Jason Tuvey, economist at Capital Economics, welcomed a decision he said would make Egypt’s economy more attractive. “For investors this is proof that the government is willing to undertake reforms and take a more orthodox approach to the economy. It is an extremely positive development.”

Hany Genena, head of research at Beltone Financial in Cairo, said the move would “stop the bleeding of the national reserves, and it will give the ailing economy the push it needs to secure foreign investment and the IMF loan.”

After the free-float was put in place the Egyptian pound rose as much as 14 to the US dollar before dropping back again. Egyptian stocks also jumped, with the benchmark EGX 30 index up more than 8 per cent at one point, the most in eight years.

Chris Jarvis, mission chief for Egypt at the IMF which has been in talks with Cairo over the loan, said “a flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment.”

Since the 2011 uprising that ended Hosni Mubarak’s three-decade autocratic rule and the ousting of his Islamist successor two years later, Egypt has struggled to revive its economy. While foreign-currency reserves have stabilised this year, they are still more than 40 per cent below their Mubarak-era levels. Reserves are about $19.5bn, down from $36bn in 2011.

The country has been largely locked out of international debt markets as investor fears over the country’s stability pushed borrowing rates to prohibitive highs, leading officials to seek alternative funding sources in the Gulf.

Omar el-Shenety, managing director of Multiples Group in Cairo, said of the free-float that it was better than having a huge gap between the official and black market rates. The difference between the official and black market rates is now expected to narrow. On Thursday, the unofficial rate fell to as low as 12 pounds from more than 18 at the start of the week.

At the same time, the move could lead to sharp rises in prices and continued currency volatility. “Stability and investment will not happen overnight. People who bought US dollars for 18 pounds will not sell them to the banks now for 13 pounds even with the attractive interest rates. Many people will wait and see,” said Mr Shenety.

Other economists also pointed out the government finances would be hit by the devaluation because the state is the main importer of food commodities and fuel and also has debt obligations in dollars.

The prices for international bonds also rose. Yields, which move inversely to prices, fell to a near three-month low, with a 2020 Egypt bond trading at 4.79 per cent.

Additional reporting by Elaine Moore

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