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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

Reduced demand for Egypt’s currency after three months of political upheaval has yet to be reflected in the exchange rate and this has begun to harm the economy, analysts say.

The unrest that began on Jan. 25 chased away tourists and foreign investors and crimped exports, among Egypt’s main sources of foreign exchange, and analysts say the central bank should allow the currency to depreciate to reflect the change.

Egypt drew down its foreign reserves by almost $6 billion in the first three months of this year to $30.1 billion at the end of March. It has also drawn down unofficial reserves by $7 billion.

“Right now the market indicates that the currency will continue to go down and they have to decide what they want to do,” said John Sfakianakis, an economist with Bank Saudi Fransi.

Egypt’s central bank says it does not target currency prices and that its policy is to let the pound reflect supply and demand.

Before the upheaval, tourists were bringing in about $1.15 billion and investors about $375 million a month. Although many have now fled, the pound has inched down by only 2.2 percent against the U.S. dollar.

Analysts say the government has been reluctant to let the pound weaken for fear of increasing the cost of imported food. Rising food prices helped trigger the protests that toppled President Hosni Mubarak in February.

But Turker Hamzaoglu, MENA economist at BoA-ML, said a weaker pound in the short term would spur exports and in the longer term boost tourism, sectors that in recent years have been among the economy’s greatest generators of employment.

“In the short run, tourists will not come even with a weaker pound until things stabilise on the political side. But on the export side, a weaker pound can still generate a comfortable advantage,” he said.

“Other than weaken the pound, there is little they can do to stimulate the economy in the short term,” said Hamzaoglu, who believes the pound should weaken by 10 to 15 percent.

Egypt is in a strong position, he said, compared to many central and eastern European countries because neither its corporates nor its households have substantial foreign currency debts that would be harder to repay if the currency depreciated.

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