The unrest that began on January 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 per cent 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.

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 January 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.