Egyptians not putting their money on pound’s surge against dollar
The Egyptian pound strengthened by about 25 per cent against the US dollar at the weekend, reaching 55 pounds on Monday after a low of more than 70 on parallel markets last week.
The rise was celebrated by state media but was expected to be temporary as dollar traders and holders reduced transactions following reports that a devaluation of the pound was imminent.
It was, in part, caused by a state operation against traders suspected of driving up the exchange rate, a political economy professor at Cairo University told The National.
“Since the start of the year, there has been report after report of currency and gold traders being arrested with large amounts of gold or dollars,” said the professor, who asked not to be identified.
“I think some of it is exaggerated, but the sheer number of arrests is a sign that the state is taking this very seriously.” Speculation on social media suggesting that a Gulf state would deposit $22 billion into Egypt’s central bank raised hope that Cairo’s woes will be eased by more funds into its official institutions rather than the black market, the academic said.
Another factor was a statement from the International Monetary Fund that its delegation had made “excellent progress in discussions on the comprehensive policy package” with Egypt towards a $3 billion loan during a visit that ended last Thursday.
The statement led to speculation that the fourth devaluation since March 2022, which is a condition of the IMF loan, was imminent, the professor said.
“The drop we are seeing is mainly because black market traders and dollar holders are keeping their FX [foreign exchange] until they see where the devaluation and the crackdown are going to end up,” he said.
Some black market traders said that they had cut operations significantly over the past week and were limiting transactions to buying dollars from sources they trusted.
Most have stopped selling dollars until a devaluation takes place, they said.
The pound’s new strength has not affected prices in Egypt. The cost of food, in particular, increased in January, and is continuing to rise.
This is because the mass arrests have curtailed trading in dollars, affecting the supply of foreign currency needed for imports, the professor said.
“Food prices are going up because dollars for imports are being withheld by black market traders trying to figure out their next move,” he said.
“Supermarkets are selling their stocked supplies, which, are increasing in price as supplies dwindle.”
Although institutions including HSBC and Goldman Sachs anticipate that the pound will be devalued by the end of March, the government has not said anything about the timing or extent of the move.
“There are currently two main camps of economic experts advising the government. Some, like Naguib Sawiris, have come out in support of the government taking its hands off currency completely so it trades at the same rate as the black market,” the professor said.
“There is also a strong camp advocating for the crackdown on currency traders and a fixing of the exchange rate.
“Considering the latest round of arrests, it’s safe to say the government is going with the latter before the former.”
The government has said that the black market price for the dollar is exaggerated because of profiteering and is trying to bring down the parallel rate before unifying it with the official exchange rate.
“The plan is to reduce demand for dollars through making it risky for people to trade on the black market,” one black market trader said. “If someone is caught, their money will be confiscated, which seems to be working so far as a deterrent. I am getting a lot less clients than I was in December.
“Part of the government’s approach is to scare dollar holders into depositing their dollars in banks and not giving them to us.”
Neither the professor or the traders expect the currency black market in Egypt to remain dormant for long, and predicted that the US dollar would rise again. “Black markets don’t stay down for long. They will adapt to the crackdown,” the professor said.
Egypt’s cabinet last week approved a motion to halt any new government projects until at least July, by which time a debt repayment of about $16 billion will be due, according to central bank data.
Another $16 billion in loan repayments is due by the end of the year, which has left many Egyptians worried after the sharpest rise in prices since the economic crisis began in March 2022.