Over the past twelve months the Egyptian pound has depreciated steadily against the currencies of its trade partners. This has been a policy driven move. In order to partly compensate for the loss in competitiveness resulting from high domestic inflation, the Egyptian central bank sought to push the currency modestly weaker by keeping interest rates low and accumulating foreign exchange reserves.
Amid ongoing political turmoil, the central bank said on Tuesday that it had intervened to halt a steeper weakening of the pound. Whether it can succeed or whether the weakening morphs into an exponential decline will depend partly on how long both the protests last and if the country’s foreign exchange reserves run out.
The Egyptian central bank’s reserves currently stand at $36bn. Commercial banks in Egypt also have net foreign assets that I estimate are worth another $18bn. The central bank will need all that forex ammunition to support the pound.
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