The Egyptian pound fell to record lows and debt insurance costs soared on Wednesday despite assurances by the country’s Islamist leaders that they would not allow the Arab world’s most populous nation to slide further into economic crisis.
The central bank imposed new rules to conserve its foreign reserves, and the finance minister sought to inject optimism by saying the pound would soon stabilize – a promise economists dismissed immediately as too ambitious.
Economists say that, with its foreign reserves at a critical level, Egypt cannot afford to continue its daily currency auctions which have been running at $75-million (U.S.) since Sunday.
Egypt sank into crisis after the fall of Hosni Mubarak in a 2011 revolution, but a new bout of political strife has wrecked the economy in the past weeks and sent Egyptians scrambling to swap pounds for U.S. dollars.
President Mohamed Mursi, under pressure to show authority and ease a growing sense of nervousness, dismissed talk on the street that his nation was on the brink of bankruptcy.
“How can anyone say that a country like Egypt, which is meeting all of its financial obligations, is going be bankrupt,” he said in a message posted on his Twitter account.
The pound fell to about 6.390 to the U.S. dollar on the interbank market. It had been trading at about 6.185 before a regime of auctions and administrative controls were introduced by the central bank on Sunday.
The pound, which had lost only 6 per cent of its value against the dollar since the uprising Of 2011, has fallen by another 3.2 per cent so far this week.
Data from Markit showed Egypt’s five-year credit default swaps (CDS) jumped 27 basis points to 4-1/2 month highs from the previous close.
Weeks of political turmoil and sometimes violent protests have taken their toll on Egypt’s already fragile economy and triggered a panicked rush by investors and ordinary people to switch their pounds into foreign currency.
Adding to the atmosphere of crisis, Mr. Mursi has been locked in a bitter stand-off with his liberal opponents who accuse his team of betraying the goals of the 2011 uprising and enacting a constitution they say is too Islamist in nature.
But it is worries about bread and butter issues that top the list of people’s concerns in the import-dependent nation.
Supermarket owner Mahmoud Zada expects prices of imported goods to go up by at least 30 per cent.
“We are facing a very, very, very difficult rise – more than the rise in the dollar,” he said.
The central bank’s foreign currency reserves have already fallen to a critical level, just about enough to cover three months of imports of vital goods such as fuel and cooking oil.
Said Hirsh, an analyst with Maplethorpe, said that since the uprising Egypt had been using its foreign reserves to keep the pound from falling.
“Now there is a new level of uncertainty: on how bad will it get. For how long can they hold,” he said. “Once there is a big loss of confidence, conditions could deteriorate really quickly.”
Mr. Mursi’s move to fast-track the constitution has divided the nation at a time when he desperately needs consensus in order to introduce unpopular austerity measures vital to securing a $4.8-billion loan from the International Monetary Fund.
Egypt has already committed to a reform plan in line with IMF recommendations but asked it to delay the loan agreement due to the political crisis over the new constitution.
Prime Minister Hisham Kandil said on Sunday he expected talks with the IMF to resume this month. Mr. Mursi has already had to suspend a series of planned tax increases in an embarrassing policy U-turn, following outrage from the opposition.
“The worst thing is if they don’t move forward with the IMF this month,” Maplethorpe’s Mr. Hirsh said.
The IMF said no date had been set for a resumptions of talks.
“We look forward to learn about the status of the government’s economic program and consult on the timing for resuming discussions on possible financial support from the IMF,” spokeswoman Wafa Amr said.
Finance Minister Mumtaz al-Saeed sought to reassure his nation that the period of turbulence would soon end.
“I expect that within a month or a month and a half matters will stabilize completely,” Mr. Saeed said in televised remarks.
“I will not say that we will go back to six pounds, though this is a possibility. But at least this surge in the dollar will never reach seven pounds.”
But some economists said this was an ambitious target.
Neil Shearing, an economist at Capital Economics, predicted the pound exchange rate at 7 per dollar by the end of 2013.
“The most important issue for investors is how the pound will get there, whether the central bank can manage it in a transparent manner or will there be a messy devaluation,” he said.
The central bank had long pegged the currency to a tight band against the dollar. One banker, who did not want to be named but who works in the treasury of a Cairo-based bank, said the central bank had narrowed the interbank currency trading band to plus or minus 0.5 per cent from the previous 1 per cent.
At its third auction under the new system on Wednesday, the bank sold $75-million, accepting 6.3510 pounds as its lowest price for one dollar. Banks were closed on Tuesday for New Year’s Day.
In November, Egypt’s foreign reserves fell by $448-million to $15-billion, equal to barely three months of import cover.
The central bank said on Saturday that foreign reserves had fallen to a critical level. Reserve figures for end-December are due to be released in the first week of January.
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