Rating agency Fitch praised on Thursday the new currency regime adopted by the Central Bank of Egypt (CBE), saying it brings greater transparency to the method by which the exchange rate is determined.
On 30 December, CBE announced it would hold periodical currency auctions to local banks to help conserve the nation's net foreign reserve which the Central Bank said had fallen to critical levels.
"The central bank can change the frequency and size of auctions giving it some control over the exchange rate but making its interventions transparent," Fitch said in a statement.
Four currency auctions were held over the course of the past week, causing the pound to fall by some 4 per cent. This brings the total drop in the domestic currency against the dollar to 10 per cent since Arab Spring unrest spread to Egypt in early 2011.
Fitch described the new system as "potentially positive", but asserted that additional measures must be undertaken to contain the crisis.
"For the system to work, confidence needs to be restored quickly, starting with agreement on an IMF programme," The agency stated.
The delay in concluding a $4.8 billion loan from the International Monetary Fund last December was one of the factors that led to the recent turbulence in the foreign currency market in Egypt and its consequences on the local currency.
CBE has defended the Egyptian pound against sharp devaluations in the past two years but in doing so, it depleted some 55 per cent of the country's foreign exchange reserves. The introduction of the auction system last week represents a change in strategy as the current level of reserves of $15 billion barely covers three months worth of exports.
The auction system was coupled by new capital controls on foreign currency to dampen demand for the US dollar. They included limiting corporate clients from withdrawing more than $30,000 in cash per day and charging individuals who buy foreign currencies a 1-2 percent administrative fee.
"Allowing depreciation can boost competitiveness and indicates that the central bank will not defend the currency at all costs," Fitch said.
Egypt's currency troubles resulted from a sharp drop in foreign currency receipts from tourism as well as capital inflows to the country. A weaker Egyptian pound, however, is unlikely to provide much support to the balance of payments.
"Suez Canal receipts, remittances and oil export revenues (55% of total current external receipts) are not sensitive to movements in the pound and currency weakness will deter foreign portfolio investors in the short term," Fitch added.