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Egypt pound drops despite Qatar, Libya lifelines

Cash injections from Arab nations fail to satisfy ever-rising demand for foreign currency, much-touted IMF loan unlikely to solve crisis

Ahmed Feteha, Thursday 16 May 2013
Egypt pound drops
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Egypt's pound has continued its slump, hitting a new low against the US dollar despite recent foreign currency injections from Libya and Qatar and a relative improvement in tourism.

The official exchange rate has reached LE7 against the dollar at commercial banks in Egypt, a rate unseen since 2003.

"While Egypt has seen injections of foreign currency from Qatar and Libya in the past few weeks, the money has not filtrated through to the market to soothe the ever-rising demand," Mohamed Abu Basha, economist at EFG-Hermes investment bank, told Ahram Online.

The supply of foreign currency, mainly from tourism, portfolio and direct investments, was hit hard by political turmoil that followed the popular uprising that toppled Hosni Mubarak two years ago.

Egypt's ailing finances received considerable lifelines from friendly nations in recent weeks. Earlier in May, officials said Qatar had deposited $3 billion in the Central Bank of Egypt (CBE) for the purpose of buying treasury bonds at the rate of 3.5 percent.

Last month, Libya deposited another $2 billion in the CBE which helped Egypt's foreign currency reserves to register their first increase in five months, recording $14.42 billion by the end of April.

Such lifelines, however, have not prompted government intervention to rein in the exchange rate despite the repercussions of a weakening pound on inflation, which edged to 8.1 percent in the 12 months to April 2013.

"The government already has many obligations in the coming period, such as debt repayment and buying diesel, especially in the summer," Abu Basha explained. "So I don’t see it heavily intervening in the currency market now."

Egypt depends on imports for most of its consumption as well as industry. CBE started to hold periodic foreign currency auctions to help conserve its foreign currency reserves, instead of freely injecting liquidity into the market.

The shortage has hit small retailers and big businesses alike. Vodafone's Egyptian business, for one, has recently said it faces difficulties in buying network equipment and it has asked some suppliers to accept payment in Egyptian pounds due to foreign currency scarcity.

A parallel market for US dollars has emerged in Egypt, where the exchange rate can be LE7.5 to the dollar or higher.

The currency market is expected to remain tight notwithstanding any help from neighbouring nations or even signing the much-touted $4.8 billion loan from the International Monetary Fund, Abu Basha explained.

"Until Egypt sees a recovery of investment and tourism, the foreign currency liquidity shortage will persist," he said.

Egypt's tourism sector, traditionally a major generator of foreign liquidity, started to show signs of a healthy recovery with some 2.86 million visitors in the first quarter of 2013 – 14.4 percent more than in the corresponding period last year.

The recovery, while much hailed by government officials, has yet to translate into higher revenues, mainly because tourism establishments have significantly lowered their prices to lure tourists.

Earlier this week, Prime Minister Hisham Qandil said negotiations with the IMF to secure a loan for Egypt are nearing completion. The agreement is expected to unlock billion of dollars in loans and aid for Egypt.

On Monday, Egypt's legislative body approved amendments to the income tax law as part of the measures the government is undertaking to qualify for the IMF loan.

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