Currency regime pulls Egyptian pound down

CAIRO - Reuters

An Egyptian key maker watches President Mohammed Morsi speaking on TV. AP photo

The Egyptian pound hit a record low over the weekend after the central bank imposed a new currency regime to try and stem a deepening economic crisis that presents a further challenge for President Mohamed Morsi.

The currency adjustment, announced at the weekend, includes regular foreign currency auctions and appeared to signal an orderly devaluation to protect foreign reserves, according to bankers, after the central bank spent more than $20 billion over the past two years to defend the pound.

It came after political turmoil in recent weeks over a new constitution had sent worried Egyptians scrambling to sell local currency. The central bank said on Dec. 29 that foreign reserves were now at a critical level and could barely cover three months of imports.

The currency crisis underlines the scale of the economic challenge facing President Mursi, who has been grappling with the fall-out of a political crisis ignited by his move to drive through a constitution written by his Islamist allies.

Prime Minister Hisham Kandil said on Sunday that the economy was in “a very difficult and fragile” situation, adding that he expected talks with the International Monetary Fund on a $4.8 billion loan to resume in January.

Egypt won preliminary approval in November from the IMF for the loan, but delayed seeking final approval until January after it suspended implementation of a series of tax increases to allow more time to explain a heavily criticized package of economic austerity measures to the public.

Violent street protests and political wrangling over the last month over Morsi’s new constitution raised fears the pound could fall further or the government could impose more capital controls and foreign reserves fell by $448 million in November to $15 billion, barely three months of import cover.

Prior to the launch of the new currency regime, the central bank had let the pound weaken by only 6 percent against the dollar since the uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors, two of the main sources of demand for Egypt’s currency. At the maiden auction of the new regime on Dec. 30, the central bank sold virtually all of the $75 million it had offered, with the highest price of pounds at 6.2425 to the dollar, down from 6.185 earlier in the day.