Egypt's central bank will start foreign-exchange auctions today after appealing to Egyptians to scale back their use of US dollars to avert a currency crisis fueled by the country's political turmoil.
Egypt to start US dollar auctions
The central bank said yesterday it will hold auctions to buy and sell dollars periodically after foreign-currency reserves dropped to the "minimum and critical level that must be preserved." They plunged almost 60 per cent to $15 billion since the revolt that ousted Hosni Mubarak almost two years ago. That covers three months of imports, central bank data show.
The move, announced hours after president Mohammed Morsi called for unity to end more than a month of escalated protests, is the latest attempt by the regulator to curb speculation that Egypt will devalue the Egyptian pound as the unrest delays an IMF loan. The currency, subject to managed float, has weakened 1.2 per cent this month while forward contracts show investors expect a 15 per cent drop in 12 months.
The auctions "are one of the central bank's final defense lines to prevent a disorderly devaluation of the pound as it awaits the resumption of negotiations with the IMF," Mohamed Abu Basha, an economist at investment bank EFG-Hermes in Cairo, wrote in a report. The auctions "will give a clear and transparent level of pricing for the local currency that market participants can monitor," he wrote.
The central bank called on Egyptians to "ration" their foreign currency use and support national industries. Egypt, the world's biggest wheat importer, abandoned a peg to the dollar in 2003 after foreign reserves plunged. The pound weakened 0.3 per cent last week to 6.1858 a US dollar, near the lowest level in eight years.
"It is now time for us to work toward the advancement of the Egyptian people as whole," Mr Morsi said in his first speech before the upper house of parliament, which now serves as the country's only legislative power until parliamentary elections, expected in two months. "There is no room for tyranny, discrimination or the absence of social justice. Regardless of the differences, all citizens are equal before the law and under this constitution."
The political turmoil has prompted Mr Morsi to delay a $4.8 billion IMF loan agreement, which his government says is crucial to lower borrowing costs and restart foreign investments. Egypt's credit worthiness was also lowered at Standard & Poor's last week to the same junk level as Greece and Pakistan, raising the government's borrowing costs.
* Bloomberg News