Volatile Currencies Spotlight Moves to Egyptian Pound

The Egyptian pound (EGP) has continued its recent fall, dropping to its lowest level ever of 7.53 to the US dollar after an auction by the Central Bank of Egypt again allowed buyers to bid higher prices for the American currency.

Having kept the EGP stable for six months, the Egyptian authorities have more recently been attempting to tackle a flourishing black market in the currency – caused by local demand for dollars – by allowing for its gradual depreciation since mid-January.

Investors and economists see the currency as overvalued and local demand for dollars has fueled a robust black market.

The central bank, which controls the official exchange rate in January, last month allowed Egyptian banks to trade dollars at up to 0.10 pounds above or below the official EGP exchange rate and also reduced the benchmark interest rates by 50 basis points as lower oil prices reduced inflationary pressures..

It has now set a cutoff price of 7.53 EGP per dollar in the latest auction that sold US$38.4m, compared to a previous rate of 7.51. The auctions have been held regularly since December 2012 and the central bank says it aims to eradicate the black market.

The move aims to make Egyptian exports cheaper and more competitive in foreign markets. It could also ease investors’ concerns that money they bring into the country could face large devaluations at some later date.

However, reports suggest that some analysts believe that the EGP needs to fall to as low as 8.25 against the dollar before export competitiveness is restored.

“Over time it will reach that, I believe, but I imagine it will be rather a stop-start process, with the central bank periodically tightening its grip if inflation concerns re-emerge,” said analyst Jason Tuvey of Capital Economics.

Egypt has suffered regular bouts of political unrest since Hosni Mubarak was ousted in 2011 after serving as president for 30 years. The economy, heavily reliant on a thriving tourism industry, has been hard hit, making it difficult to attract foreign investors. The government is reforming investment laws in an attempt to improve transparency and slash Egypt’s notorious red tape.