IN A MOVE aimed at breathing life into a stagnating economy the government this week relinquished all control of the foreign exchange market, effectively devaluing the pound, writes Niveen Wahish.

Wednesday -- the first day of trading after Prime Minister Atef Ebeid announced the policy change during the inauguration of a conference organised by the Economist -- saw the US dollar go up to LE5.4. Before the announcement the dollar had been trading at LE5.3 on the black market. Given the scarcity of foreign currency over the past two years the official rate of LE4.5 to the dollar had turned into a figure for display purposes only.

The move brought mixed reactions in economic and business circles over whether or not the benefits that will accrue from a realistic exchange rate will outweigh the negative effects of devaluation. It was, however, well received by a banking sector that had been increasingly suffering from the foreign currency crunch.

"The move is one million per cent correct, but six years late," said Amr Bahaa, treasurer at the Egyptian Commercial Bank.

Under the new system banks will set the rate at which they will buy and sell according to supply and demand. Transactions, and the price at which they are concluded, will be reported regularly to the Central Bank of Egypt (CBE). The CBE will calculate the weighted average of reported rates to set the exchange rate used for government-related transactions such as customs duties.

While confusion is likely to reign in the currency market for a brief period most commentators expect exchange rates to have stabilised after two weeks.

"One should not worry if the rate shoots up, " said Ahmed Galal, executive director of the Egyptian Centre for Economic Studies. "After speculators are convinced that it is the market that sets the price the equilibrium nominal price will prevail."