With dol­lars scarce, Egypt’s floated pound weak­ens

Kuwait Times - - BUSINESS -

Egypt’s pound weak­ened yes­ter­day, its sec­ond day as a freely trad­ing cur­rency, and traders said they ex­pected fur­ther de­clines as a se­vere dol­lar short­age in the bank­ing sys­tem was sti­fling liq­uid­ity. The cen­tral bank aban­doned the pound’s peg of 8.8 to the dol­lar last Thurs­day, de­valu­ing it by a third be­fore un­shack­ling the cur­rency in an ef­fort to at­tract in­flows of cap­i­tal and crush a boom­ing black mar­ket in dol­lars.

The pound was quoted at 16.70-17.25 to the dol­lar at 1153 (0953 GMT) yes­ter­day, but rates were volatile and spreads wide as banks tested the in­ter­bank sys­tem for the first time af­ter years of strict cen­tral bank con­trol over the cur­rency. On Sun­day the pound dropped to around 16 from 15.50, but in­ter­bank trad­ing vol­umes were very small as banks held on to the few dol­lars they had.

“To­day we have done no deals. Yes­ter­day there were con­ver­sa­tions but we had no ac­cepted trans­ac­tions,” said a trader at one bank.

Im­port-de­pen­dent Egypt has strug­gled to at­tract dol­lars and re­vive the econ­omy since a 2011 up­ris­ing that ended Hosni Mubarak’s 30-year rule drove away tourists and for­eign in­vestors, es­sen­tial sources of hard cur­rency. As the cur­rency peg drained its for­eign re­serves, the cen­tral bank in­tro­duced cap­i­tal con­trols and ra­tioned dol­lars, forc­ing im­porters to turn to the black mar­ket for their needs.

The pound hit a record low of 18 per dol­lar on the black mar­ket four days be­fore the float as fears grew that the gov­ern­ment would be un­able to carry out re­forms re­quired to fi­nalise a $12 bil­lion IMF loan an­nounced in Au­gust. But im­porters and deal­ers who bought at the top of the mar­ket are un­likely to sell un­til the pound hits 18, bringing dol­lars flood­ing back into the bank­ing sys­tem to stim­u­late trade and sta­bi­lize the cur­rency.

“Any­one who spec­u­lated last week bought dol­lars at high rates and, so far, cur­rent rates do not cover the cost of pur­chase for most of them,” one banker said. “The rate will need to hit 18 Egyp­tian pounds or so to the dol­lar be­fore they off-load, if they do.”

IM­PORTERS’ WOES EASE

The slide on the black mar­ket prompted a boy­cott by frus­trated im­porters who re­alised they would be un­able to pass on the in­creased cost to cus­tomers strug­gling with 14 per­cent in­fla­tion. The im­porters’ boy­cott drove the rate back to 13 per dol­lar vir­tu­ally overnight, giv­ing the cen­tral bank an op­por­tu­nity to un­shackle the pound.

Some bankers and black mar­ket deal­ers pre­dicted the black mar­ket would re­open, how­ever, if banks proved un­able to find enough dol­lars to sup­ply the mar­ket. Banks have been open­ing daily un­til 9 p.m. to ac­cept dol­lar de­posits and sales from Egyp­tians who had stashed dol­lars un­der their mat­tresses to hedge against in­fla­tion. The gov­ern­ment has placed pub­lic an­nounce­ments on Egyp­tian ra­dio call­ing on Egyp­tians to shun the black mar­ket, blam­ing it for fu­elling in­fla­tion, and in­stead to use the banks.

It was not clear how many dol­lars had come into banks since the float and some econ­o­mists said the gov­ern­ment was bet­ting on clinch­ing a deal with In­ter­na­tional Mone­tary Fund that would bring a fresh in­jec­tion of hard cur­rency into the econ­omy. But im­porters, who had been forced to source all their hard cur­rency from the black mar­ket for months, said they had ob­tained dol­lars from the bank since the float.

“We got about 60 per­cent of our needs to­day and this is more than we have got­ten in months. We were jump­ing for joy. If we keep get­ting these lev­els we can get a good pipe­line go­ing and it won’t be a prob­lem,” said one commodity trader. An­other trader who re­ceived a large amount of dol­lars he had been wait­ing for said: “It’s get­ting a bit eas­ier now to get your­self cov­ered from the bank so it’s a good thing.”

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