CAIRO: Egypt s central bank injected $1 billion into the interbank market on Sunday in an effort to bolster the Egyptian pound against the US dollar after the pound slid to its weakest rate against the greenback since July 2007, according to local press.
The bank intervened in order to control the interbank market and stifle speculation, according to local papers quoting Central Bank of Egypt (CBE) officials. The Head of the Exchange Bureaus Division at the Chambers of Commerce Federation welcomed the move and said that the deterioration of the pound was unjustified.
The pound slipped to LE 5.72 per dollar over the weekend. Following the central bank s action, the Egyptian currency strengthened to LE 5.63 to the dollar.
Last August, one US dollar fetched about LE 5.30. The Egyptian currency has since depreciated steadily, mostly due to the strengthening of the dollar against major currencies, a decline in Egypt s current account, the slowing of foreign investment and, reportedly, speculation. Many analysts expect the pound to fall further this year.
We have a broad, longer-term view, which is that the pound will weaken this year, said Simon Kitchen, an economist at investment bank EFG-Hermes. We also think there will be, on the part of the authorities, a preference for a weaker pound as a stimulus for exports.
The CBE did not intervene as the pound s value slipped over the past few weeks, owing to what many analysts considered a desire to protect exports. This week marked the bank s first major effort to support the pound since the slide began.
I think the authorities don t want [the rate] to move too quickly. They re a little worried about inflation, for example, and they don t want a stampede, Kitchen said. Officials would like to avoid the steep depreciations that occurred in Turkey and Russia, he said, and it is natural that they should use their reserves to ensure this doesn t happen.
But, it does seem like a large intervention, and, seemingly, people have said it was a large, unexpected intervention, he said.
Exports are important to the Egyptian economy, and many businessmen have pushed the state to help protect them.
While a stronger pound makes Egyptian goods more expensive abroad, the bank s intervention this week should not significantly harm exporters, as the biggest issue is demand, not pricing, said Reham ElDesoki, senior economist at investment bank Beltone Financial.
We do believe that any additional weakening would affect importers more than it would exporters, considering that Egypt is a net importer, she added.
Foreign investors might view the intervention as unwelcome management of Egypt s currency, according to some analysts.
But the effects, if any, should be limited, said Kitchen. If the Central Bank authorities were defending a peg . then people would be concerned, he said. I think people would be surprised if authorities just let it go and let the market dictate the price [of the pound].
Central bank interventions are not without their discontents. Mexico s economic crisis in 1994, during which that country s currency was sharply devalued, should be a lesson for Egypt, said Gouda Abdel-Khaled, a professor of economics at Cairo University.
When things went too fast and the pressure was mounting, [Mexico s] central bank lost almost $5 billion in a week trying to defend the currency. Eventually it had to let go, said Abdel-Khaled. There is no way you can challenge the fundamentals [of a currency s value].
A better method for Egypt to stabilize its exchange rates would be to apply capital controls and trade barriers – within the restraints dictated by Egypt s membership in the World Trade Organization – to decrease demand for foreign cash, he said.
Analysts in Egypt predict the pound will depreciate to between LE 5.8 and LE 6.1 by the end of the year. As of press time, the pound was trading for LE 5.64 per dollar.
