CAIRO (Reuters) - The Egyptian pound weakened on Wednesday at an exceptional central bank sale of $1.1 billion aimed at supplying dollars to importers of essential foodstuffs, allowing it to hit a new all-time low in the official market.
In a country where subsidised food is considered essential to averting social unrest, tight finances have been hindering payments for food commodities, traders have said. Egypt is the world’s biggest wheat buyer.
The central bank announced a cut-off price of 7.0950 pounds to the dollar at the auction, weaker than at the last central bank foreign exchange sale held on Monday, when the cut-off price was 7.0451.
In the interbank market, the dollar changed hands for as much as 7.1049 pounds, the lowest according to Thomson Reuters data going back to the 1990s.
The rates banks are allowed to trade dollars at are determined by the results of the central bank sales, giving the bank effective control over official exchange rates.
The central bank sold the entire amount it had offered.
Egypt has been suffering from a sustained dollar shortage as political turmoil following the 2011 uprising against veteran leader Hosni Mubarak unnerved foreign investors and tourists, traditionally major sources of foreign currency.
Egypt’s foreign reserves rose to $17.489 billion in April from $17.414 billion in March, but are still markedly lower than the $36 billion seen before the 2011 revolt.
Banks and traders say some of the funding problems which surfaced early last year have re-emerged.
“This auction is intended to cover and clear all pending food backlogs to secure availability of staple food commodities over the coming period,” the central bank said in a statement.
Wednesday’s auction is significantly larger than the $40 million foreign currency sale Egypt holds three times a week.
At its last exceptional dollar auction on January 27, the central bank sold $1.5 billion at a cut-off price of 6.9518 Egyptian pounds.
The Egyptian pound has dropped more than 10 times in a row at the sales as the central bank allows it to weaken, hitting successive lows.
On the black market, the dollar traded at around 7.49/52 on Wednesday afternoon, slightly stronger than Tuesday’s rates of 7.52/54, a trader said.
The bank introduced regular dollar sales in December 2012 to counter a run on the pound.
Arab Gulf countries pledged more than $12 billion in aid to Egypt after the army deposed Islamist president Mohamed Mursi last July after mass protests. But even the Gulf aid has not prevented Egypt’s current account recording a deficit of around $1.5 billion between October and December.
“It’s a managed depreciation. It makes sense to have a depreciation of the pound to bring it to a more realistic level,” said Angus Blair, chairman of business and economic forecasting think-tank Signet.
“Depreciation is part of an economic policy programme that Egypt requires. It could be part of getting the house in order ahead of presidential elections.”
Former army chief Abdel Fattah al-Sisi is expected to easily win a presidential election due on May 26-27.
Cairo-based forex traders have raised the possibility the pound might appreciate again after the elections.
One trader said Wednesday’s drop was the biggest since the first quarter of last year.
The impact of the exceptional auction on the black market may be limited, especially with the Islamic fasting month of Ramadan in the summer, when families come together every night for a large meal.
The pound strengthened on the black market after the last exceptional auction in January for a few hours, only to weaken to its previous levels the next day.
“I doubt it will supply the market with what it needs. Demand is rising at the moment for food imports for Ramadan supplies. Secondly the pick up in construction has raised demands for building materials,” said Moheb Malak, economist at Prime Securities.
“In the short term, the current month at least, pressures on the pound are strong, the auction will only give temporary relief.”
Reporting By Shadia Nasralla; Additional reporting by Tom Perry; Editing by Gareth Jones and Toby Chopra