In a surprise move, as recommended by theory and best practice, the prime minister announced the floatation of the Egyptian pound on January 28, 2003. To the government credit, the shift to a flexible exchange rate regime did not come in the wake of financial and/or banking crises, in contrast to what happened, for example, in Mexico in 1994, Brazil in 1999, and more recently in Argentina. Rather, the shift came as an attempt to resolve policy inconsistency originating from a combination of exchange rate rigidity, reluctance to use international reserves to support the peg to the dollar, and an attempt to reduce the interest rate to activate the economy. Something had to be done, and floating was believed to be an important part of the answer.
Author(s): Ahmed Galal