Dollar shortage stifles trade in newly floated Egyptian pound

November 6, 2016 4:53 AM EST

A customer counts his Egyptian 50 pound notes at an exchange office in downtown Cairo, Egypt, April 19, 2016. REUTERS/Amr Abdallah Dalsh


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By Asma Alsharif and Eric Knecht

CAIRO (Reuters) - Egypt's pound avoided the sharp drop that many had feared on its first day as a freely traded currency, but bankers said that was because years of dollar shortages had starved the market of liquidity.

The pound weakened in interbank trade on Sunday, slipping from 15.50 per U.S. dollar to close at 16. Volumes were very low with banks reluctant to part with scarce dollar holdings and ordinary people still stashing the greenback under their mattresses to hedge against inflation.

"Banks don't have dollars, and if they do, there is no bank that will sell to another bank," said one banker, adding that most institutions were executing trades at the minimum allowable amount of $10,000.

Egypt floated its currency on Thursday seeking to crush a booming black market for dollars and clinch a $12 billion International Monetary Fund loan. It initially devalued the pound by about a third from its peg of 8.8 to the dollar, then let it slip further.

Banks were open over the Friday-Saturday weekend to accept dollar deposits and sales from clients, but Sunday was the first formal day of trading without direct central bank guidance.

Businessmen and importers welcomed the end of strict rationing of dollar supplies at banks. But some expressed disappointment that the central bank did not flood the system with hard currency to make trading easier.

Many traders think the pound could still depreciate sharply in coming days or weeks as banks struggle to meet an anticipated deluge of pent-up demand from importers.

"All banks are short of dollars ... There need to be inflows coming into the banking system for the interbank market to work," the banker said.

"Logically, if it is a properly functioning market, the natural thing would be for the price of dollars to keep rising, until flows comes in from outside the banking system ... That is not happening now - all banks are just holding on."

FLOWS

Egypt has struggled to attract dollars and revive the economy since the 2011 uprising that ended Hosni Mubarak's 30-year rule drove away tourists and foreign investors, essential sources of hard currency.

The pound hit a record low of 18 per dollar in the black market last Sunday as fears grew that the government would be unable to carry out reforms required to finalize the IMF loan.

The slide on the black market prompted a boycott by frustrated importers, who realized they would be unable to pass on the increased cost to customers already 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 revive, however, if banks proved unable to find dollar supplies.

"Importers will be desperate so they will have to go to us for FX," one dealer said.

Black market volumes were low on Sunday as most traders waited to see how the interbank system would operate, but some deals were done at 17 to 17.25.

The black market traders said the central bank had stepped up its monitoring of foreign exchange bureaux to ensure they did not sell at rates too far from the interbank rate.

Alaa Ezz, head of the Federation of Egyptian Chambers of Commerce, said that in the wake of the dramatic policy change, ordinary Egyptians were hesitant to sell their dollars to banks. But he said they would start doing so in a week or 10 days, which would help the pound strengthen.

"I believe there are still billions of dollars at home that need to enter the banking system."

Hani Berzi, chairman of Edita, one of Egypt's largest snack makers, said: "If you ask me today, I would say no, banks don’t have enough supply of foreign currency. But I think it will stabilize in the next few weeks or months."

(Additional reporting by Arwa Gaballa, Amina Ismail, Ahmed Aboulenein and Lin Noueihed; Writing by Lin Noueihed; Editing by Andrew Torchia/Ruth Pitchford)



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