Egyptian Prime Minister Atef Obeid said the Central Bank would set and reinforce “safe limits” to stem the local pound's slide against the dollar and restore stability in Egypt's currency.
The government responded to public concern about the pound's weakness by closing five foreign exchange bureaux for alleged violations.
The pound, pegged for nine years at 3.3-3.4 to the dollar, has been undergoing what analysts call a “crawling devaluation” since it was unpegged in May. On Monday, exchange bureaux quoted the currency at 4.09 pounds to the dollar.
“Yesterday, we charged the Central Bank with the role of being the leader and controller of the foreign exchange market,” Obeid said in a policy speech to parliament. The Central Bank's role was to “determine the rate of exchange for the Egyptian pound [against the dollar] based on the average market rate over the past three months”, he said.
The Central Bank would ensure that banks and exchange bureaux respect these limits and allow the dollar rate to rise gradually within “safe and defined limits”. Obeid said the decision aimed to bring stability to the forex market after what he called “unlimited and unsafe speculation in the past few weeks”.
Clampdown on exchange bureaux
A Central Bank source said the economy ministry had closed down five foreign exchange bureaux for breaking market rules. “The bureaux were closed on Monday, four of them for periods of between two and six months and one permanently,” he said, naming them as Mecca, Alexandria International Exchange Co, Rehab Exchange Co, Pitco Company for Financial Transactions and al-Basha.
The source said Mecca had been closed permanently. Khaled Ibrahim Mohamed, manager of Mecca, confirmed the bureaux had been shut, but said it hoped to reopen, perhaps after an appeals committee has met in a month's time.
David Lubin, economist at HSBC in London, said the authorities appeared to be unhappy about the exchange rate exceeding four pounds to the dollar. “On the basis of the information that has been presented to the market so far, it seems that the Egyptian authorities are seeking to re-peg the pound, albeit with a small fluctuation zone around the peg,” he said.
Hassan Choucri, head of sales at HC Securities in Cairo, said many foreign investors would react negatively to a swing back away from market forces in foreign exchange policy. “A lot of people were hoping to see forces of supply and demand determine the currency price,” he said.
He said a negative reaction among foreign investors was behind some selling of big cap shares on Monday. But the benchmark Hermes Financial Index still ended higher, closing up 108.21 points, or 1.5 percent, at 7,322.33.
A broker at another Cairo brokerage said there would be some positive effects of stemming the decline in pound-dollar rates for some big cap stocks like mobile phone operators, which pay a large part of their licence fees in dollars. Mobile phone operator Egyptian Company for Mobile Services (MobiNil) is heavily weighted in the Hermes index.
This article was first published by Reuters on 22 January 2001