Published — Monday 31 December 2012
Last update 31 December 2012 1:47 am
CAIRO: The Egyptian pound hit a record low against the dollar yesterday as worried Egyptians shifted their money out of local currency after the central bank introduced a new currency regime to protect foreign reserves.
The new regime, announced on Saturday and which includes regular currency auctions, seemed to represent a controlled shift toward a free float after the central bank spent more than $ 20 billion in reserves over the past two years to defend the pound, according to bankers.
The currency crisis underlines the scale of the economic challenge facing President Mohamed Mursi, whose administration has been grappling with the fall-out of a political crisis ignited by his move to drive through a constitution written by his allies.
The shift to a freer floating currency raised fears the pound could fall further or the government could impose more capital controls, prompting Egyptians to shift into the dollar when the market opened yesterday.
Prime Minister Hisham Kandil told a news conference that the economy was in "a very difficult and fragile" situation, adding that he expected talks with the International Monetary Fund on a $ 4.8 billion loan to resume in January.
Egypt won preliminary approval in November from the IMF for the loan, but delayed seeking final approval until January after it suspended implementation of a series of tax increases to allow the government more time to explain the heavily criticized package of economic austerity measures to the public.
The central bank, which had previously allowed the pound to move within a tight range against the dollar, has spent more than $20 billion in foreign reserves to support the currency since a mass uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors.
At the maiden auction of the new currency regime yesterday, the central bank sold virtually all of the $ 75 million it had offered, with the lowest price of pounds at 6.2425 to the dollar, down from 6.185 earlier in the day.
The pound subsequently weakened on the interbank market to about 6.30, a fall of 1.8 percent from the morning, smashing through a previous low in October 2004.
The auction system means the price of the Egyptian pound will begin to reflect supply and demand more closely, bankers said. The central bank is expected to hold the auctions daily.
"The arms of central bank that used to be there will not make (the) market anymore, so it is for first time a real free market," said one banker who works in a treasury room.
Kandil announced a national economic initiative at his news conference yesterday, which he described as an effort to build consensus around the government's economic program.
He said the government would seek to engage society so the state's economic plan "really is a national plan". He said the government's program could be amended to reflect other views.
"We hope that there will not be any fundamental changes in our plan with the IMF because we will summon them in January so we resume discussions to go forward in the matter of the loan," Kandil said.
Analysts said it was not yet clear if the new currency regime would stem the run on the pound and how much of its foreign reserves the central bank was prepared to spend to continue defending it.
The central bank also imposed a series of measures to dampen demand for foreign currencies, at least in the short term, including limiting corporate clients from withdrawing more than $ 30,000 in cash per day and charging individuals who buy foreign currencies a 1-2 percent administrative fee, bankers said.
Egyptian banks will also not be able to hold long positions in US dollars of more than 1 percent of their capital, down from a previous 10 percent, the bankers added.
In a note, Pharos Research forecast a forecast a free float with the Egyptian pound weakening to 6.50 to the US dollar from about 6.185 now.
Under the new regime, withdrawals by individuals will continue to be limited to $ 10,000 a day. All transactions will continue to be monitored to make sure they are for "legitimate" needs and do not involve speculation, bankers said.
The interbank market will continue to operate alongside the auction system, with banks allowed to quote slightly wider spreads.