Falling to a new eight-year low, the Egyptian pound reached 6.30 to the dollar on Sunday as the central bank conducted its first currency auction in a bid to combat the shortage of dollars on the market and curb the strain on foreign reserves.
Worsening economic conditions and a weakening pound, which has fallen more than three percent since late November, spurred panic among Egyptians who have rushed to convert their savings into dollars, thus exacerbating the crunch on the main foreign currency.
The Egyptian pound has gradually fallen more than five percent since the onset of the 25 January uprising, but it has been on a steady and sharp decline from a rate of 6.09 on 22 November, when President Mohamed Morsy issued a controversial constitutional declaration that led to a polarized political climate.
Sentiment darkened further after the divisive constitution was passed in a rushed referendum, and as political tensions showed no signs of easing.
The Central Bank of Egypt (CBE) said in a statement Saturday that it has introduced a new auction system for buying and selling US dollars, and warned that the country’s foreign reserves reached a “critical” level.
At Sunday’s inaugural auction, the CBE sold $74.9 million to banks, and said the weighted average bid price was 6.2526 pounds to the dollar, Reuters reported. In the interbank market, the pound bid at 6.185 to the dollar. Bankers told Reuters that the pound’s rate was at 6.30.
Mohamed al-Abyad, head of the forex division at the Egyptian Federation of Chambers of Commerce, told Egypt Independent that the exchange rate was not set on Sunday since currency exchanges offices were unable to buy or sell due to a dearth of dollars.
They are also waiting to learn more about the CBE’s new auction system, he says, adding that its impact could not yet be determined.
According to the CBE, reserves are at the lowest level needed to meet Egypt’s international debt requirements. The last available figures from November show that foreign reserves stood slightly above $15 billion, even with help of deposits from Qatar.
Economic experts say this level barely covers three months of imports, thus compromising Egypt’s ability to supply the consumer market with vital commodities.
Conflicting reports last week about the resignation of CBE Governor Farouk al-Oqda, which were later denied, further dented market sentiment and the uncertainty created more panic among citizens. In a clear attempt to thwart anxiety, Oqda soon after attended a meeting of the government’s economic committee.
In a statement later, the bank affirmed its commitment to guaranteeing all deposits in local and foreign currencies in Egyptian banks. The statement in itself is reason for concern.
Egypt also recently banned travelers from carrying more than $10,000 in or out of the country, as fears of a possible run on banks mounted.
Compounding the already dire situation, Standard & Poor’s recently downgraded Egypt’s long-term sovereign rating to ‘B-’ from ‘B’, making it more costly to borrow and less attractive to invest.
When the CBE was listing the dollar as selling at 6.18 to the Egyptian pound, buying dollars at currency exchanges proved more costly, with a rate that reached 6.25, confirming the resurgence of a black market. Egypt had managed to quell black market trading when it decided to let the pound float in 2003.
At a currency exchange office in Cairo’s upscale district of Maadi, there were no dollars on hand but the staff offered customers euros instead. A number of banks also said they were low on cash dollars, pushing people to seek other foreign currency at a higher price from exchanges around Cairo.
“I want to exchange money because I heard that the Egyptian pound is losing its value — better be safe than sorry,” says one customer waiting at the currency exchange office.
Bankers said the dollar rush left banks and money exchangers short, but confirmed that more bank notes had been ordered from abroad.
“Cash is the problem. We had a shortage in cash dollars these last few days; consequently it may be difficult for depositors to take out their money. But the shortage should be solved in a week or so,” says a senior manager in treasury at BNP Paribas who spoke on condition of anonymity.
Egyptian banks have recently imported around $300 million-$500 million to cover the shortage, he adds, a sizeable amount by global standards.
The panic-driven mad dash to withdraw dollar deposits or convert pounds has strained the dollar supply and created a black market. “The problem is that they take the dollars and keep them stashed at home, which cuts the cycle of buying and selling and creates a shortage. With rumors that the dollar will reach 7.50 pounds, [some believe] they are set to make a significant profit,” he says.
But according to him, the problem is limited to cash dealings, while banks are still able to provide dollars for imports and corporate transactions, which is vital.
He also sees the problem fizzling out when those who rushed to buy dollars realize that they will not make the expected profit. On the contrary, he expects those medium savers who rushed to change their pounds to dollars, sometimes at prices higher than 6.25, to incur losses.
The decision to postpone final approval on the $4.8 billion International Monetary Fund loan has added stress to Egypt’s finances. A batch of new taxes introduced when Morsy’s decisions were immune from judicial review then swiftly suspended are set to be implemented in January, which, despite controversy over them, are likely to set the loan negotiations back on track.
“An extensive delay in the IMF deal will definitely lead to disorderly devaluation, which is likely to take the USD-EGP up to 7.0 pounds, where dollarization would be the crack to the system,” Mohamed Abu Basha, an economist at regional investment bank EFG-Hermes, wrote in a note published last week.
Abu Basha lowered his forecast for the currency to 6.60 pounds to the US dollar by the end of 2013, from an earlier forecast of 6.40.
Meanwhile, foreign reserves continue to be a critical issue facing the overall economy since the main sources of replenishment–tourism and foreign direct investments–have dried up and are far from recovering.
Egypt has burned through more than $20 billion of reserves to prop the pound over the past two years. Experts say the recent political turmoil will certainly be reflected in December’s reserves figures, due to be released in the first week of January.
“The economy is a reflection of the political turmoil,” says Abyad. “Major foreign currency earners, such as foreign direct investment and tourism, have been hit because of political turbulence and deterioration in security,” since the uprising, he adds.
In order to get the economy back on track, Abyad says, “Stability is key.”