Egyptian Currency Problems

Tough times ahead in Egypt.

On the last day of 2012 the Egyptian central bank sold off $74.8m in order to prop up the value of the falling Egyptian pound. This is on top of the sale of roughly $20bn of foreign reserves in order to balance the currency since the start of the political uprisings that got rid of President Mubarak and kicked off the Arab spring protests.

This unprecedented depletion of foreign has led to President Morsi to go cap-in-hand to Qatar in order to obtain a $1.25bn loan to boost foreign reserves, which now takes Qatari assistance in Egypt up to $4bn.

One statistic that investors are keeping a wary eye on is the Households' dollarisation ratio i.e. the level of foreign currency holdings as a proportion of money supply. "Increased household dollarisation and a run on the currency, that's the big risk," says Jean Michel Saliba, a Bank of America-Merrill Lynch Middle East economist. A run on a currency that has already depreciated significantly over the last week, from E£6.20 to E£6.50 to the dollar, poses a problem for Egyptian authorities. The expectation of a $4.8bn loan from the IMF is encouraging some local support for the currency, failing this, the Egyptian pound and indeed economy could face some seriously tough times ahead.