* Egypt pound sinks to record low for second day in a row
* Mursi says fall will "balance out" within days
* Egyptians hunt for dollars at exchange bureau
* Prices of imported staples set to rise
By Patrick Werr and Yasmine Saleh
CAIRO, Dec 31 Egypt's pound fell to a record low
on Monday as the president signaled his government would allow
it to depreciate slowly for several more days to stop a drain on
foreign reserves that has driven the economy into crisis since
the fall of Hosni Mubarak.
Hit by a new bout of political turmoil in the last month,
the pound had weakened to a record low on Sunday at a new dollar
auction brought in by the central bank. It fell further at a
second auction on Monday, last trading at 6.37 to the dollar on
the interbank market.
The drop means the central bank has allowed the pound to
slide almost 3 percent over the last two days after limiting its
decline to only 6 percent since the uprising that removed
Mubarak from power almost two years ago.
The pound's fall, which is certain to increase the price of
imported staples such as tea and sugar, underlines the economic
crisis facing President Mohamed Mursi as his administration
tries to contain the political fall-out of his move to
fast-track a contentious new constitution passed into law last
Egyptians, panicked by street clashes between Mursi's
Islamist backers and his more secular-minded opponents on the
streets of Cairo and other cities, have rushed to change their
pounds into dollars in recent weeks, fearing it would be
"The market will return to stability," Mursi told Arab
journalists on Sunday evening, the state news agency MENA
The pound's fall "does not worry or scare us, and within
days matters will balance out," he said.
Having just sold their last dollar bills, dealers at one
Cairo foreign exchange bureau did not bother changing the price
board when the new low appeared on their trading screens.
"He took our last dollars," one of the traders said,
pointing to a man walking out of the door.
Outside, another man told a friend his dollar hunt had
failed. "They have no dollars. What can I do?" he said on a
mobile phone. "I went to many dealers and could not find
The fall has been driven mainly by ordinary citizens who
have been trying to turn their savings into foreign currency,
worried that the pound will weaken further because of the latest
The crisis wiped 10 percent off the value of Egyptian stocks
when it erupted in late November. But the main index
has mostly recovered since then, climbing in the two sessions
since the introduction of the new foreign currency system.
Market participants attribute the rise to buying by Arab and
international investors using the cheaper pound to bargain hunt.
FREE FLOATING POUND
The auctions are part of a shift announced on Saturday and
designed to conserve foreign reserves, which the bank says are
now at "critical" levels that cover just three months of the
food, fuel and other goods Egypt imports.
Bankers have described the new system as a move toward
establishing a free market value for the pound, which has been
tightly controlled since a managed devaluation that ended in
The head of the Egyptian banking federation said the new
system was an "important first step" toward a free float.
In remarks to MENA, Tarek Amer, who is also chairman of
Egypt's largest bank, state-owned National Bank of Egypt, said
the new system was a success on its first day and had
"significantly reduced" demand for dollars.
The International Monetary Fund also gave the new currency
policy its stamp of approval, an important imprimatur given that
Egypt hopes to secure a $4.8 billion IMF loan. "IMF staff is in
close contact with the authorities and we remain strongly
committed to supporting Egypt," an IMF spokeswoman said.
The central bank has sold about $75 million at each of
Sunday's and Monday's auctions.
The run on the pound prompted officials last week to impose
controls on how much cash could be physically carried out of the
country. Security men at one Cairo bank branch had to remove one
customer angered by a $10,000 limit on how much currency he
could withdraw, witnesses said.
The changes announced on Saturday include regular foreign
currency auctions and limit how much foreign currency companies
can withdraw at a time.
The central bank had spent more than $20 billion - or more
than half of its reserves - over the past two years to defend
the currency. The reserves fell an additional $448 million in
November to about $15 billion.
Prices of imports have already started to rise. Pyramid Oil
Field, a company that imports chemicals for use in water
treatment and oil fields, had raised its prices 10 to 15 percent
last week, fearing a further weakening of the pound.
"This instability obliges you to increase the price, to have
a safety factor," Ashraf el-Gamal, president and managing
director of the company, told Reuters. "From now on, the
contracts will be of a very short validity."
To be on the safe side, he was projecting that the pound
would weaken to stand at 9 against the euro, compared with a
previous level of 8.
Prime Minister Hisham Kandil said on Sunday that the economy
was in "a very difficult and fragile" situation, adding that he
expected loan talks with the IMF to resume in January.
Egypt won preliminary approval in November from the IMF for
the loan, but delayed seeking final approval until January after
it suspended a series of tax increases to allow more time to
explain a heavily criticized package of economic austerity
measures to the public.
Kandil's efforts to revive the economy have been hit by the
latest turmoil, which scared off tourists who had begun to
return. On the eve of the anti-Mubarak revolt, Egypt's tourism
industry accounted for one in eight jobs.
Mursi hoped that the passage of a new constitution would
stabilize Egypt's politics, giving him space to implement
economic reforms and attract investment. The constitution,
written by Mursi's Islamist allies, was approved in a popular
referendum in December.
But it remains the focus of controversy, and the opposition
is likely to seize upon austerity measures demanded under an IMF
deal as a stick to beat the Muslim Brotherhood ahead of a
parliamentary vote expected in early 2013.
Two-fifths of Egypt's 84 million population live near the
poverty line and depend on subsidies that are straining the
Gamal of Pyramid Oil Field said he knew of at least three
foreign companies that were hesitant to make large investments
in the country because of the instability.
"They are feeling insecure because of everything that is
happening," he said. "One is looking to invest billions."