The Egyptian pound slumped to a more-than eight-year low today against the dollar after the central bank held its third auction of the U.S. currency aimed at limiting its availability to protect dwindling reserves.
The central bank sold $75 million at a cut-off price of 6.3510 pounds to the dollar, according to its data on Bloomberg. The currency fell to an all-time low of 6.3910 to the dollar and was trading at 6.3873 as of 2:40 p.m. Cairo time, according to prices compiled by Bloomberg.
The North African nation’s central bank started the sales this week in order to guard foreign currency reserves from further depletion after they reached the “minimum and critical level.” It was the latest attempt to shore up an economy battered by the aftershocks of the January 2011 uprising against Hosni Mubarak. Officials have voiced worries about the growing budget deficit and say the country needs to finalize a $4.8 billion loan with the International Monetary Fund to bridge the fiscal gap and shore up investor confidence.
The central bank is “using any kind of policy instrument it can to prevent a disorderly devaluation, but it’s clearly running out of options,” Said Hirsh, head of economics at Maplecroft, a risk adviser based in the U.K., said by phone. The question now is “if the pound continues to slide, are we going to see interest rate hikes or capital controls or any other kind of policy measures?”
Net international reserves have dropped to roughly $15 billion, or about 60 percent below their level prior to the uprising two years ago. That’s enough to cover about three months of imports, central bank data show.
Under the auctions that began Dec. 30, each bank has been allowed to bid for as much as $11 million. The pound has depreciated about 3 percent since the sales began.
The exchange rate will “never” weaken to 7 pounds, Finance Minister Momtaz el-Saieed said today by phone, calling the current levels “temporary.” Egyptian officials, including President Mohamed Mursi, have said they expect the local currency will bounce back.
Hirsh said such comments were “self-defeating,” and that investors “looking at Egypt will again sit on the sidelines waiting” for the currency to weaken to the 7 pound level.
Over the past year-and-a-half, Egyptian officials have been “denying any kind of rumor that they’re in trouble, delaying any kind of move with the IMF” and offering “no credible plan or economic policy apart from very vague forecasts and expectations and hopes,” said Hirsh. “It’s just rhetoric with no action and there’s not much space for it at the moment.”
Prime Minister Hisham Qandil said earlier this week that Egypt will host the IMF this month with the hope of finalizing the agreement. Egypt had signed a preliminary deal with the IMF, only to seek a delay amid protests and unrest linked to Mursi’s efforts to push through a divisive constitution.