Egypt’s central bank fights hard against currency crisis

CAIRO/LONDON - Reuters

A man walks next to a currency exchange office in downtown Cairo, Egypt. The Egyptian pound has been sliding despite bringing the exchange rate at banks to 6.42 pounds to the dollar. AP photo

Egypt has dipped deeper into its rapidly shrinking currency reserves, fighting to slow a sliding pound which is likely to push up inflation and risks reigniting popular unrest.

Economists warned that the central bank had little room left for maneuver with its readily available foreign currency reserves enough to cover just over two months of Egypt’s import bill, well below levels in many of its emerging market peers.

The pound slid further on Jan.3 at the central bank’s fourth auction of foreign currency, with $74.9 million sold to banks at a cut-off price of 6.386 pounds, weaker than 6.351 to the dollar a day earlier.

Egypt’s currency has lost about 10 percent against the dollar since the start of 2011, just before the Arab Spring unrest spread to the country. But about a third of that has come this week alone, since the central bank began auctioning $75 million a day out of its reserves on Sunday.

“The pound is extremely vulnerable,” said Raza Agha, chief economist for the Middle East and Africa at VTB Capital.

“This auction system they should have done months ago to stem the decline in reserves rather than using them to defend an arbitrary level of the pound, which has gotten them to where they are now.”

Egypt’s once-booming economy was thrust into turmoil after the 2011 revolution that ousted Hosni Mubarak but weeks of renewed political unrest at the end of last year dealt it another heavy blow.

Egyptians began the new year in an atmosphere of growing anxiety, with few expecting any quick solutions as political infighting continues before a parliamentary election expected to get underway within two months.

With the crisis deepening and the pound hitting fresh record lows every day, economists believe more financial mess could be in store for the Arab world’s most populous nation.

“This is the worst possible way of managing the devaluation, squandering $300 million a week to slow the decline,” said one economist based outside of Egypt, who spoke on condition of anonymity due to the sensitivity of the matter.

Protracted political wrangling is bad news for President Mohamed Morsi who desperately needs consensus in order to introduce unpopular austerity measures, vital to securing a $4.8 billion loan from the International Monetary Fund (IMF).

To conserve reserves and restore confidence, Egypt has imposed new rules involving daily foreign currency auctions and has promised that the situation would soon stabilize.

Businesses say they are factoring in an even bigger decline in the pound’s value and inevitable steep price rises in country which imports most of its food.

Unnerved by the events, Egyptians have rushed to buy dollars for fear of a messy devaluation, and banks have been forced to impose limits on dollar withdrawals to prevent a run on deposits.

The central bank alarmed Egyptians further when it announced last weekend its foreign reserves had fallen to what it said was a critical level, at around $15 billion as of late November. December figures are due out in the coming days.

This equates to about three months’ worth of imports. However, one Cairo-based analyst said that if the gold bullion portion of reserves were subtracted, end-November reserves coverage were equivalent to 2.1 months of imports.