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Egypt constitution passes, economic crunch looms

By Sarah El Deeb

Associated Press

Published: Tuesday, Dec. 25 2012 3:58 p.m. MST

In a sign that the new front for the opposition against Morsi's policies may be the economy, Dawoud said the Morsi administration was "confused" both on the political and economic fronts.

"We want stability and economic prosperity like everybody else. But we don't believe that the policies of Morsi and the Brotherhood will lead to more stability," he said.

The turmoil over the constitution sparked huge protests that turned deadly at times. For a moment, the tension looked like it was spiraling out of control and only added to an already weakened economy.

At the height of the protests, the government called off its talks with the International Monetary Fund over a $4.8 billion loan which Morsi's government viewed as a way to attract much needed foreign investors, and deal with a high budget deficit.

Major foreign currency earners, such as foreign direct investment and tourism, have dropped off because of political unrest and deterioration in security following Mubarak's ouster in February 2011.

Over the last two years, the country has lost more than half of its foreign currency reserves from $36 billion in 2010 to around $15 billion currently. The reserve level has been slightly propped up by some Qatari deposits in past months.

Economic experts say that Egypt's current foreign reserves barely cover three months of imports, which is the IMF's minimum recommended coverage.

There were signs on Tuesday that some Egyptians were starting to hoard dollars for fear that the local currency could weaken significantly.

The run on the dollar was fueled in part by a decree issued by Morsi late Monday banning people from leaving Egypt with more than $10,000 or its equivalent in other currencies.

Some currency exchanges in the upscale Cairo neighborhood of Zamalek ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars.

"I asked around in many exchange places and can't find dollars anywhere," said Cairo resident Mahmoud Kamel after unsuccessfully visiting one exchange office. "I want to exchange money because I'm afraid the Egyptian pound will not have any value soon."

The dollar rush prompted the Central Bank of Egypt to issue a statement on Monday calling on banks not to listen to rumors circulating about the fiscal health of the nation.

The bank declared its commitment to guarantee all deposits in local and foreign currencies to banks in Egypt and said banks are "financially strong enough."

There was one particularly nerve-rattling report in recent days that longtime Central Bank Governor Farouk Okdah had resigned. The report came on Saturday during the second and final round of voting on the constitutional referendum.

Official media quickly retracted the news after reporting it. The governor then turned up at a meeting of the government's economic team on Sunday in an apparent attempt to quell nervousness over the state of the economy.

Egypt's currency had been stable trading around 6 pounds to the dollar for the first half of the year. It has since slipped, especially in the past two months as political instability worsened. The dollar was selling Tuesday at 6.18.

Rumors swirling around impending tax hikes, subsidy cuts and other bread-and-butter issues have heightened the public's concern. Around 40 percent of Egyptians live just at or below the poverty line of surviving on around $2 a day.

In a sign of the worsening economy, the number of people living on under $1 a day rose to 25 percent in 2011, up from 21.6 percent in 2009, according to government statistics released last month.

Promises that the Islamist-drafted constitution would bring about the stability Egyptians crave were dismissed by economic experts who warned that without enough currency reserves, there is little to stop the pound from falling.

"The instability of the foreign exchange rate is not at all detached from the political instability. It is a reflection and clear mirror to what is happening," said Haytham Abdel Fattah, head of the Treasury and International Markets Manager at Industrial Development Bank.

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Mariam Rizk contributed to this report

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