CAIRO – The Egyptian pound continued its fall on Monday, dropping to its lowest level ever against the dollar after a central bank auction again allowed buyers to bid higher prices for the sought-after U.S. currency.
Authorities have allowed a steady decline since mid-January, having previously kept the pound stable for six months. Investors and economists see the currency as overvalued and local demand for dollars has fueled a robust black market.
The bank, which controls the official exchange rate, set a cutoff price of 7.53 Egyptian pounds per dollar in an auction that sold $38.4 million, compared to a previous rate of 7.51. It says it aims to eradicate the black market.
The move will help make Egyptian exports cheaper and thus more competitive in foreign markets, and could help assuage investors’ concerns that money they bring into the country could face large devaluations down the road.
Capital Economics in London estimates the pound would have to fall to 8.25 against the dollar in order to restore export competitiveness.
“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,” economist Jason Tuvey said.
The central bank announced a looser monetary policy last month, cutting the benchmark interest rates by 50 basis points as lower oil prices reduced inflationary pressures. But as the pound weakens, dollar-priced imports become more expensive and could fuel so-called second-round inflation.
The central bank in January allowed Egyptian banks to trade dollars at up to 0.10 pounds above or below the official exchange rate. On Monday, many were selling dollars at the maximum allowed within that band — 7.63 pounds. Black market traders were selling dollars at around 7.90.
Political unrest since the 2011 ouster of longtime autocrat Hosni Mubarak has battered the Egyptian economy, leaving the vital tourism industry in tatters and 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. A major investment conference is scheduled for March.