Egypt’s central bank will start foreign-exchange auctions tomorrow in order to preserve foreign reserves after they plunged to “minimum and critical” levels.
The North African nation’s central bank said the sales and purchases of U.S. dollars will take place periodically and aim to “preserve foreign-currency reserves and ration their use,” according to an e-mailed statement today. The new mechanism will support the dollar interbank market, it said. Egypt’s net international reserves have slumped almost 60 percent in the two years since the start of an uprising that ousted former President Hosni Mubarak.
“The current level of foreign-currency reserves constitutes the minimum and critical level that must be preserved” to meet necessary needs like repaying external debt and importing “strategic commodities,” the central bank said in the statement.
The Egyptian pound, subject to a managed float, has weakened 1.2 percent so far this month according to data compiled by Bloomberg, amid political unrest and after Standard & Poor’s lowered Egypt’s credit rating to the same junk level as Greece and Pakistan. That’s the second-biggest depreciation in the Middle East and North Africa, and took the currency to 6.1858 a dollar yesterday, near the lowest level in eight years.
The government has struggled to pry economic growth from last year’s 19-year low as industries including tourism suffer from continued unrest. Egypt has faced growing tension in recent weeks as a vote on a new constitution sparked clashes between opponents of President Mohamed Mursi and his Islamist backers.
The central bank said it was committed to honoring external debt payments, and called the financial position of the banking sector “is strong and sound.” S&P lowered the credit ratings of three Egyptian banks, including Commercial International Bank Egypt SAE (COMI), the biggest publicly traded lender, on Dec. 26.
“The Egyptian economy since the beginning of 2011 has been facing many grave challenges due to the length of the transitional period and the political instability” has contributed to hurting economic indicators, the central bank said.
The central bank also urged Egyptians to “ration” their foreign currency use and to support national industries. The pound is likely to weaken to 7.3 to the dollar in 12 months, reflecting bets it will depreciate 15 percent in that period, non-deliverable forwards data show.