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 by 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 Morsy as his administration tries to contain the political fall-out of his move to fast-track a contentious new constitution passed into law last week.
Egyptians panicked by street clashes between Morsy'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 devalued further.
"The market will return to stability," Morsy told Arab journalists on Sunday evening, the state news agency MENA reported.
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 their price board when the new low appeared on their trading screens.
"He took our last dollars," said one of the traders, 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 by mobile phone. "I went to many dealers and could not find dollars."
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 political turmoil.
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 towards establishing a free market value for the pound, which has been tightly controlled since a managed devaluation which ended in 2004.
The head of the Egyptian banking federation said the new system was an "important first step" towards 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 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 also 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 by a further $448 million in November to about $15 billion.
Prices of imports have already started to rise. Pyramid Oil Field, a firm that imports chemicals for use in water treatment and oil fields, had put up its prices by 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," said 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 to a previous level of 8.
Prime Minister Hesham Qandil said on Sunday that the economy was in "a very difficult and fragile" situation, adding that he expected talks with the International Monetary Fund on a $4.8 billion loan 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.
Qandil'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.
Morsy 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 Morsy'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 around the poverty line and depend on subsidies that are straining the treasury.
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."