CAIRO - Egypt’s central bank introduced a new currency regime on Sunday to conserve its foreign reserves, which it said had reached a critical level, a move bankers and analysts say may represent a controlled shift towards a free float.
The regime includes regular currency auctions, with the central bank offering $75 million at the maiden auction on Sunday, with Egyptian banks allowed to bid for a maximum $11 million each.
This means the price of the Egyptian pound will begin to reflect supply and demand more closely, bankers said.
“The arms of central bank that used to be there will not make market anymore so it is for first time a real free market,” said one banker who works in a treasury room.
The announcement of the move was posted on the central bank’s website on Saturday, just two hours after President Mohamed Mursi used a major policy speech to declare the economy was showing signs of improvement.
The central bank has spent more than $20 billion in foreign reserves to support the pound since a mass uprising against Hosni Mubarak in 2011 chased away tourists and foreign investors.
The central bank also imposed a series of measures to dampen demand for foreign currencies, at least in the short term, including limiting corporate clients from withdrawing more than $30,000 in cash per day and charging individuals who buy foreign currencies a 1-2% administrative fee, bankers said.
Egyptian banks will also not be able to hold long positions in U.S. dollars of more than 1% of their capital, down from a previous 10% the bankers added.
In a note, Pharos Research forecast a forecast a free float with the Egyptian pound weakening to 6.5 to the U.S. dollar from about 6.185 now.
Under the new regime, withdrawals by individuals will continue to be limited to $10,000 a day. All transactions will continue to be monitored to make sure they are for “legitimate” needs and do not involve speculation, bankers said.
The central bank was due to accept bids from 11 a.m. to 11:30 a.m. and announce the results at midday.
The interbank market will continue to operate alongside the auction system, with banks allowed to quote slightly wider spreads.