Central Bank of Egypt Allows Pound to Weaken Further

Egypt’s pound fell on Monday for the third time in a row against the dollar at the central bank’s regular auction of foreign currency, and kept trading weaker on the black market.

The central bank last week allowed the pound to slip against the dollar at official prices for the first time since the army ousted Islamist President Mohamed Morsi in July.

One economist said the authorities appeared to be adjusting policy to allow the pound to weaken as Egypt prepares to pay off debts of hundreds of millions of dollars in January, with more due later next year.

The central bank has burned through billions of dollars supporting the currency since Egypt’s 2011 revolution, which cut into tourism revenues and foreign investment.

At Monday’s dollar auction, the central bank sold $38.6 million to banks at a cutoff price of 6.9075 pounds to the dollar, weaker than the 6.8972 at the previous sale on Thursday.

On the black market, which has flourished as supplies of dollars have dried up at official rates, a market participant said the greenback was offered for 7.45 pounds in comparison to 7.42 pounds on Thursday.

Official exchange rates for the pound are linked to its price at the foreign exchange auctions brought in by the central bank a year ago to counter a run on the pound.

In the interbank market, the pound fell to 6.92 against the dollar – three piastres weaker than Sunday’s close.

At official rates a year ago, the pound stood at 6.17 against the dollar. It weakened to around 7 in July before strengthening gradually until last week.

Further pressure on Egypt’s reserves is expected as the country has started paying back part of over $6 billion it owes to foreign energy companies.

Egypt is due to pay $700 million to the Paris Club countries in January 2014 and an additional $700 million in July, central bank governor Hisham Ramez was quoted as saying in a newspaper interview published this month.

He added it would pay $2.5 billion, the value of bonds owed to Qatar, towards the end of 2014.

Reserves fell to $17.8 billion at the end of November, moving closer to the $15 billion mark seen as a critical level to cover about three months of imports.

Relieving some pressure on reserves, Saudi Arabia, the United Arab Emirates and Kuwait pledged over $12 billion in aid to Egypt after the army toppled Morsi following mass protests against his rule.

“The central bank is having to bend policy a little given the general market constraints,” said Angus Blair, chairman of business and economic forecasting think-tank Signet.

“It is paying off capital to the oil companies, and it knows what its commitments are in 2014, and while it knows Egypt can expect more help from the GCC (Gulf Cooperation Council states), this is not an infinite amount. I think the market should expect further weakness in the Egyptian pound.”

The central bank was not immediately available to comment.

Currency traders said they were puzzled as to the reasoning behind the depreciation of the pound.

The central bank has cut interest rates three times by a total of 150 basis points since July, stressing growth over inflation and cutting borrowing costs for the heavily indebted state. Urban consumer prices rose 13 percent in November year on year.

“For them keeping the currency stable or slightly appreciating was their only way of fighting inflation,” said one Cairo-based currency trader.

“The premium between unofficial and official rate has been widening now to about 8 percent. They’re trying to close that gap.”

Source: Reuters