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Draconian measures follow dirty float

Egypt

The Egyptian government received widespread praise for its decision to float the pound in January after 12 years of keeping it pegged to the dollar. But after less than two months of a dirty float the government imposed draconian capital controls.

Prime minister Atef Obeid issued a decree on March 24 forcing exporters to convert 75% of foreign exchange revenues to Egyptian pounds in a bid to improve dollar liquidity in the official market which has been undermined by a parallel market that persisted despite the floating of the currency.

The move is a blow to the credibility of the government's commitment to reforming the economy. It took analysts by surprise. Just days before the announcement, analysts and bankers in Cairo were saying that despite the Egyptian pound's fall, with $14 billion in reserves, the situation was bad but not desperate. Moreover, the measures come just weeks after rumours of a similar proposal were denied by the government and visiting World Bank officials.

Even if the new controls work, the way they were announced has damaged government credibility. "This is a blow to the reform story and the perception that the government had turned the corner," says HSBC economist Taher Gargour.

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