As pound stabilizes, CBE moves against the black market

The Egyptian pound held steady at LE7.53 to the dollar Sunday for the fourth auction in a row, after losing 5.5 percent of its value since the beginning of the year.

After holding steady at LE7.14 to the dollar from May to January, Egypt’s central bank allowed the pound to slide at every auction from January 18 to February 2. 

The Central Bank controls the official exchange rate via currency auctions, at which it sells dollars to local banks. Banks can resell dollars to customers for 10 piasters above the official interbank rate, making the legal market rate LE7.63 to the dollar, where it has stood since last Sunday.

“I don’t think it’s the end of the devaluation process. I guess it’s just a breather at this point,” says Hany Genena, head of research at Pharos Securities Brokerage.

The rate may eventually decline further, to LE7.70 or LE7.80, Genena says, but for now Central Bank Governor Hesham Ramez has indicated in television interviews that he believes the current rate is fair.

The CBE started the devaluation process to bridge the gap between the official rate and the black market or “parallel” rate, explains Genena.

While holding the pound steady, the bank is taking aggressive moves to kill the currency black market.

Last week, Ramez set limits on dollar deposits to local banks. Under the new rules, individuals and companies are allowed to deposit a maximum of US$10,000 per day, up to US$50,000 per month.

“It’s equivalent to throwing a nuclear bomb on the parallel market,” says Genena of the restrictions.

For months, importers and other companies who are unable to source dollars through the banking system have turned to the black market to supply them with currency.

Until last week’s currency restrictions were put in place, importers could deposit dollars purchased on the black market at their local bank, obtain letters of credit, and proceed through the normal import process.

By limiting deposits, the CBE prevents large sums of black market cash from being used for legal import procedures.

“[Ramez] didn’t allow any large scale deposits to be taken to the bank in cash in a bag,” explains Genena, who adds that major importers regularly deposit millions of dollars at a time to fund imports. 

“It will stop imports altogether for one to two or three weeks,” he adds.

The Central Bank is counting on the fact that with their primary customers gone, currency traders will eventually be forced to sell their dollars to local banks, increasing the banks’ dollar supplies and ultimately allowing importers to meet their currency needs through the banks.

Genena believes that by holding the pound at LE7.53 to the dollar, the Central Bank governor is giving currency traders a chance to sell their inventory at a rate close to what they bought it at.

Once the black market it destroyed, Genena predicts the bank will enter “the second and final phase of the depreciation process: triggering two-way bets on the pound.” At this point, instead of continually devaluing or freezing the pound, it would fluctuate up and down depending on market forces.


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