What does the term floating pound mean?

The term means completely freeing the hand of the central bank (which is responsible for the country’s monetary policy) from the currency, allowing it to flow freely according to the laws of supply and demand, and this happens when the central bank completely loses control and runs out. of all its tools.

This usually happens when the harbinger of a major financial crisis affects the country’s economy and may push it into bankruptcy. In this case, the Central Bank of Egypt will try to bring the currency exchange rate closer to the fair price or the bid and ask price to ensure the stability of the currency market for some time to come, including narrowing the spread between the official exchange. rates. The rate and its counterpart on the black market. So as not to resort to further depletion of cash reserves.

  •  Features:

A weak pound is considered beneficial for exports; It increases the competitiveness in terms of price and the attractiveness of foreign investment due to other factors such as political stability, loose investment regimes, tax regimes and transparency in both the public and private sectors.

  • Damage:

It hurts imports because importers will have to pay more pounds to convert them into dollars for imports. With millions of pounds (if the value of the reduction is in pounds), the amount was increased by one million pounds to get one million dollars.

Of course, this increase raises the prices of goods, which are ultimately borne by consumers, and therefore the rate of inflation will rise sharply in the future.

But if Egypt’s trade balance suffers from a deficit (imports are higher in value than exports), and exports are largely raw materials, then this decline will exacerbate the trade balance.

  • External debt:

The depreciation of the pound increased the country’s external debt, as it had to pay a larger amount than before to convert it into dollars to repay the debt or pay off the debt. If a country owes $1 billion, for example, this equates to about 9 billion, and when it is reduced (if it’s 1, for example), it becomes 10 billion.

  • Purchasing Power:

If the value of the pound falls, for example, by 15%, the purchasing power of the pound drops once, exceeding the inflation rate for an entire year, and the value of savings erodes. once in the same percentage. For example, whoever owns a thousand pounds, the real value of this amount becomes if the pound decreases to about 855 pounds, and we measure the interest on the deposit, whether it is a bank or different country programs, as well as the salary in Egyptian pounds.

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