CAIRO (AP) — Egypt’s currency dropped against the U.S. dollar on Thursday, slipping as violent clashes this week between security forces and protesters pushed it within reach of lows set during the aftermath of the uprising that ousted former President Hosni Mubarak.
The pound traded at 5.9750 to the U.S. before closing at 5.9675 to the U.S. currency, according to forex Web site, Xe.com. The drop brought the pound to levels not seen since Mubarak handed over power to a military council following an 18-day uprising.
The declines come at a delicate time for the country. Officials are trying to enact political reforms and ready for September parliamentary elections while some complain that the efforts are not moving quickly enough. At the same time, Egyptian officials are struggling to boost the economy, which was hard hit by the initial uprising.
The clashes between police and protesters on Tuesday and Wednesday were sparked by complaints that the prosecution of officers accused of brutality during the uprising that began Jan. 25 was not moving quickly enough. The unrest helped push the Egyptian stock exchange’s benchmark index down 2 percent on Wednesday. The EGX30 index closed 1.68 percent higher on Thursday.
Cairo-based Mideast investment bank Beltone Financial, in a research note released Thursday, said it expected that the Central Bank will use up to $5 billion of its net international reserves in the first half of fiscal 2011-2012 to bridge the foreign currency gap, “after which the (pound) will depreciate to hit 6.6 (pounds) against the dollar.”
With foreign investments down sharply and tourism hard hit, the Central Bank has been forced to step in at least once to support the pound. Net international reserves have fallen by almost $9 billion since January. The reserves fell to $27.2 billion in May versus $28 billion in April. The rate of decline, however, slowed.
The clashes are “definitely delaying the recovery of tourism, and without the recovery of tourism it would be very difficult to see how we would deal with the decline in reserves,” said Wael Ziada, head of research at Mideast investment bank EFG-Hermes in Cairo.
But Ziada downplayed the likelihood that the pound would break the 6 pound to the dollar mark, saying that he expects it to stabilize around the current levels until the end of the year “unless, obviously, something drastic happens in the next few weeks.”
Adding pressure on the pound was Egypt’s decision to not borrow from the International Monetary Fund and the World Bank.
Egyptian officials turned down a $3 billion IMF loan, opting instead to scale back on spending in the fiscal year and bring the deficit in to 8.6 percent of GDP compared to the 11 percent figure that had been projected under the draft budget for the year.
But the decision to shift away from reliance for foreign help could add to domestic fiscal constraints.
While the Central Bank wants to maintain currency stability, it “has a ceiling after which it can no longer continue to draw on its foreign currency reserves,” said Beltone. “We expect the CBE will resort to direct borrowing of foreign currencies in FY11/12 to compensate for the reduced external budget sector borrowing.”