The Egyptian pound fell to a record low against the dollar Sunday as the central bank stepped into the market to try to stabilize trading and stop an anxious public that has been buying up dollars for fear of an even bigger dive in the local currency, bankers said.
The pound slid more than 3 percent on the first trading day after the central bank introduced a new dollar auction system that bankers said appeared designed to allow a "controlled devaluation" of the Egyptian pound. Many economists consider the pound overvalued and propped up by the government, which has used fast-dwindling foreign currency reserves to keep the value artificially high.
Khaled Abdel-Hamid, from Union National Bank of the UAE in Egypt, said the central bank is now directly involved in trading to stabilize the market and will probably help stop speculation on the currency by panicked buyers.
Egypt is grappling with a crippling deficit and foreign reserves have fallen to $15 billion from $36 billion in 2010, before the uprising that toppled Hosni Mubarak.
The central bank announced the new auction system a day earlier, urging citizens to "ration usage" of foreign currency in favor of the Egyptian pound. It said that foreign currency reserves, which have been hemorrhaging for nearly two years, are at a "critical" level — the minimum needed to cover foreign debt payments and buy strategic imports.
Under the new auction system, the central bank sold all $75 million on offer to banks on Sunday.
As the currency weakened, the prime minister said Egypt will resume talks in January with the International Monetary Fund after Cairo suspended its request for a $4.8 billion IMF loan during the recent political turmoil over the disputed constitution.
Fearing even greater political turmoil, President Mohammed Morsi called off tax hikes and spending cuts that were part of the economic program it submitted to apply for the IMF loan, scuttling the loan request itself. But now that the constitution has been approved in a public referendum, the government has again turned its attention to economic reforms.
Many had expected a currency devaluation as part of the IMF deal, which had gained preliminary approval in November ahead of the outbreak of the political crisis and mass street protests over the constitution.
Over the past week, fears of an imminent currency devaluation led to a rush on dollars, putting further pressure on the Egyptian pound. The worries were fuelled in part by the government's move to cap the amount of foreign currency people can take with them as they leave the country.
Two bankers familiar with the new auction system said it brought the exchange rate to 6.365 pounds to the dollar — a loss of nearly 3 percent of its value — from 6.19 pounds to the dollar on Thursday, the last trading day.
"This is a kind of controlled devaluation," said one of the bankers from a state bank who had attended meetings with the central bank governor to discuss the plan.
"And this is only in the first four hours," he added, speaking on condition of anonymity because he was not authorized to speak to the media.
According to the new plan, retail buyers will pay up to 2 percent commission on purchasing dollars from the bank. It also limits banks from holding more than 1 percent of their capital net worth in foreign currency, down from 10 percent.
"This will create new supply," Abdel-Hamid said.
Both bankers said it remains to be seen how the new auction system will help stabilize Egypt's currency as the market remains worried about the government's ability to draw up and implement reforms in a highly polarized political environment.
Prime Minister Hesham Kandil tried to address those concerns, calling for national unity in the face of tough economic reforms needed to secure the IMF loan and buoy investor confidence.
"We need the vote of confidence from the IMF," he told reporters. "We hope to have more consensus on the government program. We hope there are no core changes to our plan with the fund," he added. He did not say when talks with the IMF would resume.
At another venue, Finance Minister Mumtaz el-Said told reporters that the governor of the central bank was meeting with heads of banks to discuss the outcome of the auction.
"The alternative to devaluing the pound may be to print money," el-Said said. "We refuse this ... Since 2003 till now, we never printed money." Devaluing the pound, he added, could add to the government burden and the budget but will also boost the government's foreign currency earners, such as Suez Canal revenues.