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Egypt pound seen under pressure to weaken

Egypt pound seen under pressure to weaken

Weaker pound would quickly spur export industries; Cenbank support of currency seen draining reserves; Steady pound needed stability, other analysts argue

May 5, 2011 2:35 by

At the same time, most of Egypt’s sovereign foreign currency debt is owed to bilateral or multilateral organisations, Hamzaoglu said.

Rather than an expensive and ultimately unsustainable policy of drawing down reserves to support the pound, the government could contain food prices through a more focused policy of higher food subsidies through mechanisms already in place, analysts said.

“Over the long term the policy fails, and you’re giving the wrong messages,” Sfakianakis said. “Controlling the currency when you’re saying it’s a free-floating currency defeats the purpose of a free market.

“If they go against the market they will end up depleting their foreign currency reserves pretty quickly,” he added. “To deplete their resources to show to the world the currency is strong doesn’t really serve a purpose at this stage.”

In a April 15 note, Beltone Financial forecast that a worsening balance of payments would drive down the currency to an average 6.40 to the dollar in the 2011/12 fiscal year, which begins on July 1. That would be 9 percent below its price of 5.82 before the Egyptian unrest erupted on Jan. 24.

“With our projections of an NIR (net international reserves) position covering six months of imports by end fiscal year 2010/11, we believe the (central bank) will not resort to currency intervention in 2011/12,” it wrote.

One dissenting voice is Simon Williams, an economist with HSBC who believes the Egyptian authorities have made the right choice by keeping the pound steady against the dollar.

“With the political outlook still so uncertain and the economy yet to find its feet, the resilience the currency has shown has done a lot to enhance stability and keep deposits within the banking system and in local currency,” he said.

“On a trade weighted basis, the pound has weakened a long way. Against the euro, it’s off 10 percent since the start of the year.”

Williams said Egypt, currently ruled by an interim military council, was unlikely to let the pound slide until after parliament elections scheduled for September and presidential elections soon after.

“Until the elections have taken place, I’m not sure the authorities will feel they have a mandate for more substantial change,” Williams said.

By Patrick Werr

(Editing by Mark Heinrich)

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