Egypt begins auctioning foreign currency

Egypt’s central bank introduced a new system today for buying and selling foreign currency, the Wall Street Journal reported.

The system features regular currency auctions, designed to allow the Egyptian pound to float more freely, with its price more closely reflecting supply and demand, bankers told Reuters.

Previously, the central bank had allowed the Egyptian pound to fluctuate within a small range against the dollar, Reuters reported.

With tourism and foreign investment dropping off following the mass uprising against Hosni Mubarak in early 2011, Egypt has spent more than $20 billion in foreign reserves in the past two years to defend the pound, Reuters reported.

That’s caused the country’s foreign currency reserves to drop to a dangerously low level, the government said yesterday, the Wall Street Journal reported.

According to the Wall Street Journal:

Reserves fell to $15.04 billion at the end of November, only slightly above the three months of import cover that the International Monetary Fund recommends as a minimum foreign-currency cushion.

The auctions “are one of the central bank’s final defense lines to prevent a disorderly devaluation of the pound as it awaits the resumption of negotiations with the IMF,” Mohamed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes Holding SAE, wrote in a report before the sale, Bloomberg News reported. They “will give a clear and transparent level of pricing for the local currency that market participants can monitor.”

In its first currency auction today, the central bank sold $74.9 million of US currency to banks at a cut-off price of 6.2425, Bloomberg News reported.

The new system has Egyptian-currency holders worried that the government could introduce more capital controls, Reuters reported. The pound hit a new low on the interbank market today, falling 1.8 percent to about 6.3 to the dollar, Bloomberg News reported.

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