The Egyptian pound hit a new low last week, when it saw the biggest plunge in its exchange rate against the dollar in months on the official market. The decline came after an exceptional tender had been made to sell dollars to banks in order to pay for the foodstuffs needed for the holy month of Ramadan. The Central Bank of Egypt (CBE) sold $1.1 billion of reserves, pushing the pound-dollar exchange rate slightly higher to bring losses since the beginning of the year to 2.2 per cent. The exceptional auction was considerably larger than the usual $40 million dollar sale the CBE holds three times a week to allow the banks to meet their obligations for the hard currency needed to pay for food imports. The Central Bank sold the total amount it had offered at LE7.0950 to the dollar at the auction, weaker than during its regular sale a few days earlier. On the black market, the dollar was trading at around LE7.52/54 on Monday afternoon, a trader at an exchange bureau said, adding that he expected the pound to gain strength against the dollar after the presidential elections. At the last exceptional dollar auction held on 27 January, the CBE sold $1.5 billion at a rate of LE6.9518 against the dollar. Egypt's foreign reserves increased to $17.489 billion in April from $17.414 billion in March, but they are still much lower than the $36 billion before the 25 January Revolution. “This auction aimed to pay for all the pending transactions for food commodities over the coming period,” the CBE said in a statement. Some experts say that the CBE is intentionally allowing the pound to drop in value against the dollar as a form of “managed devaluation” to bring it closer to its real market price. This would be part of a broad economic policy that Egypt is implementing in line with the long-required reforms demanded by the IMF and World Bank, they add. “Trying to lift the hefty energy subsidies, applying VAT, and the devaluation of the pound are all indications that the government is trying to implement these necessary reforms, whether or not it is seeking a loan from the international bodies,” a financial expert who preferred to remain anonymous said. On the other hand, the moves could be a way to set the country's economic house in order ahead of the presidential elections on 26-27 May. Other experts say that the dollar will continue to rise against the pound, adding that the CBE should have stopped pegging the dollar against the pound after the 25 January Revolution to avoid the current problems. The dollar has been rising in the wake of Egypt's declining foreign currency reserves and depleted other sources of foreign currency. The tourism sector saw a fall in the first quarter of 2014, as tourism revenues decreased by 43 per cent year-on-year, recording just $1.3 billion, the Central Agency for Mobilisation and Statistics (CAPMAS) reported. Foreign direct investment registered $2.8 billion in the first half of the 2013/2014 financial year, announced Hassan Fahmi, Chairman of the General Authority for Investment and Free Zones (GAFI), last week, compared to $3 billion in 2012/2013. Moreover, Egyptian non-petroleum exports declined by 11 per cent during April, earning $1.8 billion compared to $2 billion during the same month a year earlier, according to the Ministry of Industry, Foreign Trade, and Investment monthly report. “Demand for the dollar is on the rise for a number of reasons, among them to buy food imports for Ramadan. The rise in the prices of local construction materials has also raised demands for importing building materials,” said Moheb Malak, a financial analyst at Prime Securities. There is a demand for importing steel and cement from foreign markets, as local prices for these materials are increasing, he explained. The exceptional CBE auction was supposed to temporarily support the pound, but this did not in fact happen, Malak added, given the strong pressure on the pound. A third reason for the rise in the price of the dollar is the escalating demand for imports of petroleum products such as natural gas and petrol, especially during the summer months when there will likely be growing demand for electricity. Fuel subsidies on petroleum products cost the government $15 billion a year, a fifth of the state budget, keeping petrol prices well below market values. There are no apparent plans for the Arab Gulf countries at present to step up their financial aid to Egypt. The Gulf Cooperation Council (GCC) countries have granted Egypt more than $12 billion in aid since the deposition of former president Mohamed Morsi last July after mass protests. “We have to admit that the political scene is uncertain at the moment, and this aid is tied to political scenarios. They are probably waiting for the results of the presidential elections,” suggested Malak.
