Egypt central bank moves to curb pound's decline

Egypt's Central Bank. (AP/Nasser Nasser)

CAIRO: Egypt's central bank tightened the pound's trading band in the interbank foreign exchange market and reduced the frequency of foreign currency auctions on Monday, apparent moves to slow the currency's decline as a new central bank governor takes office.

Hisham Ramez took up his new position on Sunday with the pound trading at a record low against the U.S. dollar because of political instability linked to the country's transition from decades of army-backed autocracy.

A foreign exchange dealer at a Cairo bank said banks may now only buy or sell dollars or their equivalent to other banks in a band of 0.01 pounds above or below the weighted average bid at the central bank's regular currency auctions. Previously, the limit had been 0.5 percent above or below the average bid.

But analysts doubted the moves would halt the fall in the pound and expected the country to have to continue running down its financial reserves.

Political strife has triggered a flight into dollars and other foreign currencies, putting renewed pressure on Egypt's stock of foreign currency which the central bank warned in December had fallen to a critically low level.

This prompted the central bank on Dec. 30 to introduce a system of regular auctions of U.S. dollars to get the exchange rate under control, and since then it has allowed the pound to slide by 8 percent against the dollar.

The pound was last bid at 6.6995 on the interbank market on Monday, strengthening slightly from its closing level of 6.7153 in the previous session. But it is changing hands at least several piastres weaker among unlicensed traders in Cairo.

In another move coinciding with Ramez's move into office, the central bank also signalled it would reduce the number of foreign currency auctions held on a weekly basis to two from three. This means the price of the currency will be revised only twice this week instead of last week's three times.

The central bank sold $73.1 million at its 17th such auction on Monday, and said the next one would be on Wednesday.

After introducing the foreign currency sales on Dec. 30, the central bank had initially held daily auctions. It later reduced the frequency to three a week, holding the auctions on Sundays, Tuesdays and Thursdays.

The bank gave no further details on the timing of further auctions in a brief statement.

"We expected the decline in the frequency to happen at a later stage when the supply and demand are in balance which is not the case at the moment," said Hany Genena, head of research at Pharos Securities Brokerage.

"There is no balance and by reducing the frequency of auctions the supply of dollars to the banking system will be even lower so dollar pressure on the pound is expected to be even higher," he said.

Souheir Asba, a frontier market strategist at Societe Generale, said the pound would keep weakening. "The problem is I don't believe they have enough money to prevent the depreciation," he said.

"If they keep doing the auctions, it is mathematically impossible that the EGP will go up, although we don't know how much, in terms of dollars, is actually going in. But I do believe that the outflow is bigger than the inflow," he said.

The pound has lost 13.4 percent of its value against the U.S. dollar in the two years since Mubarak was toppled.

Egypt's foreign reserves currently stand at around $15.5 billion, less than half their level on the eve of the uprising against Mubarak.





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