The Egyptian pound fell to a record after the central bank held a second dollar auction, even as President Mohamed Mursi voiced confidence the currency would soon stabilize.
The pound weakened almost 1 percent to 6.3649 a dollar at 3:45 p.m. in Cairo after the central bank sold $74.8 million at a cut-off price of 6.3050 a dollar, according to data compiled by Bloomberg.
The daily auctions, which followed the government’s delay in securing a $4.8 billion International Monetary Fund loan, are designed to cap demand for dollars after foreign-currency reserves plunged almost 60 percent since last year’s uprising. Political tensions may escalate as the government is forced to cut costs amid worries by Egyptians the moves will harm an impoverished population.
The weakening is a “mini-devaluation,” Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes Holding SAE, said in a report. The central bank’s main target is “to instate a transparent mechanism to value the pound through the market with an aim to limit speculation.”
The currency depreciated 2.6 percent in the year to Dec. 27, data compiled by Bloomberg show. Still, Mursi said the pound’s drop relative to the dollar “doesn’t worry or scare us,” the state-run Middle East News Agency reported. The situation ‘will even out in a few days,” he said.
Tarek Amer, chairman of the National Bank of Egypt, the country’s biggest lender, said the mechanism has “dealt a blow to the black market.”
Government assurances, including a public appeal to limit the use of dollars, haven’t allayed broader worries fueled by the delay in the IMF loan and warnings of an even greater budget deficit. Some exchange houses in Cairo turned customers away before the central bank’s auction, while others said they didn’t have enough dollars to meet demand.
“What we’re seeing now is the real price of the pound,” Wael Samir, manager of Al-Tawheed Exchange in Cairo, said in an interview yesterday. “There has been huge demand and not enough supply over the past few days. People were expecting a devaluation and were trying to buy dollars to hold.”
The central bank sold $74.9 million to banks yesterday at a cut-off price of 6.2425 a dollar, a 0.9 percent depreciation from the Dec. 28 closing price, according to data compiled by Bloomberg. The benchmark EGX 30 Index gained 0.3 percent today, bringing a rally this year to 51 percent.
In announcing the auction, the central bank called on Egyptians to “ration” their foreign-currency use after reserves fell to a “critical” level.
The central bank’s step “should have been taken months ago, instead of using limited reserves to defend an arbitrary level of the pound,” Raza Agha, chief regional economist for VTB Capital Plc in London, said in an e-mailed response to questions. “It would have prevented reserves from falling as dramatically as they have.”
Egypt, the world’s biggest wheat importer, abandoned a dollar peg in favor of a managed float in 2003 after foreign reserves plunged. The crisis gave rise to a black market for dollars before Central Bank Governor Farouk El-Okdah introduced an interbank market to ease access to the U.S. currency.
Whether or not the central bank’s move yields the intended result is “really based on how soon we’re going to get the IMF loan in order to start having foreign inflows in the country,” Mona Mansour, chief economist at CI Capital in Cairo, said by phone. Securing the loan in the first quarter of 2013 would mean “we’re still in safe levels. Afterward, if things get worse, this could create a panic, but for the time being I don’t see that at all.”
Egypt delayed the IMF agreement, originally slated for this month, amid protests over a divisive constitution that Mursi pushed to a referendum. He also suspended tax increases linked to the economic program presented to the fund after their announcement sparked new turmoil. Standard & Poor’s, citing the political unrest, lowered Egypt’s credit rating to the same junk level as Greece and Pakistan on Dec. 24.
The government is seeking to conclude the IMF agreement in January, and will set a date to impose the suspended taxes pending a national dialogue, Finance Minister Momtaz El-Saieed said in a statement today.
Officials say the loan is critical to winning backing from other lenders such as the World Bank, the European Union and the U.S. Foreign support has “stalled” pending a final deal with the IMF, Planning and International Cooperation Minister Ashraf el-Arabi said in an interview yesterday.
The unrest has reflected on the government’s efforts to sell debt. It raised 1 billion pounds selling nine-month notes today, missing a 3 billion-pound target, central bank data on Bloomberg show. It had canceled the sale of 6 billion pounds ($970 million) in six-month and one-year treasury bills Dec. 27.
“Egypt needs an IMF program,” Agha said. “Concurrently, the government must work to attain broad-based political stability” or the pound will remain “vulnerable.”
“I would not be surprised if the CBE is forced to use interest rates or liquidity measures to defend the pound if the currency continues to weaken at the current pace,” he said.