Pound slides on unrest
Clashes in Tahrir Square this week have led to the worst depreciation of the pound in eight years, reports Ahmed Kotb
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While the Egyptian pound was traded at LE3 to the dollar after the 1952 Revolution, nine months after the stepping down of Mubarak, the pound has surpassed LE6 to the dollar
The value of the pound dropped again, following unrest that swept the country this week. This time it traded at LE6.05 to the dollar on Monday, its lowest value since 2004.
The slide came after one of the most violent confrontations between security forces and protesters that erupted Saturday in Tahrir Square. "Demand on the dollar increased by 100 per cent since Saturday," said Bilal Khalil, deputy head of the exchange division of the Federation of Egyptian Chambers of Commerce (FCC).
Khalil went on to say that many people prefer to convert pounds to dollars in times of crisis. "The exceptionally high demand on the American dollar resulted in a shortage of supply and a higher cost," he said.
However, Khalil pointed out, the pound until Monday was still sold officially at LE5.98 in banks, but exceeded LE6 in exchange companies because they did not have enough cash to meet the soaring demand.
"Armoured money transfer vehicles were not safe anymore because law breakers take advantage and target the vehicles for a hijack," Khalil said. "Transferring dollars between banks and exchange companies has become worrying more than ever."
Khalil also said that many vital banks and exchange companies remain closed in the Tahrir Square area, making the situation worse. Banks in other areas across the country either close early or do not open at all, depending on their location.
Khalil believes that banks have the needed supply to stabilise the market but are afraid to transfer money to their branches and exchange companies at this time.
As is the case during all crises, Khalil added, the black market has flourished, where the dollar is sold at an even higher price. This leads to a further weakening of the local currency. "People just look to invest in the safe haven of the dollar without thinking of the repercussions on the pound," he said.
Salama El-Khouli, economist at the National Bank of Egypt, said that Egyptian investors who already possess large quantities of dollars prefer to preserve them until the difficult times are over. Such behaviour also contributes to the shortage of supply. Moreover, El-Khouli added, many foreign investors in the Egyptian market sell their shares and convert their money to dollars and search for another stable market to invest in which "really hurts the pound".
The Central Bank of Egypt (CBE) usually steps in to help stabilise the value of the pound against the dollar using foreign reserves, which have reached $22.1 billion this month. But with the reserves' depletion, it is hard to continue doing so, El-Khouli said. Reserves were stood at around $36 billion before the 25 January Revolution.
However, El-Khouli believes that the pound's situation is not worrying until now because it has lost only PT3 to the dollar in comparison to last week. "Looking back at the fluctuation of the pound's value since 25 January, I expect that the hard times will be over in the next few days and the pound will recover the losses," he said.
EGYPT is reconsidering whether to ask the International Monetary Fund (IMF) for a $3 billion loan. Although the government rejected the possibility earlier this year, it has recently announced that it may ask for the loan due to high domestic borrowing costs. Officials announced that the government has discussed the issue and that there is an agreement, but that it is waiting for the right time.
Egypt's ruling military council turned down the previous loan agreement in order not to increase the country's foreign debts, relying instead on domestic loans.
Egypt's economy is struggling to recover from the aftermath of this year's revolt as tourists shun the country and strikes curb factory output. The result was that GDP grew 1.8 per cent in the fiscal year which ended in June 2011, compared with 5.1 per cent in the previous year according to government figures. Moreover, the country's international reserves fell in 10 months to $22.1 billion in October according to the Central Bank of Egypt.