Egyptian pound weakens as dollar demand surges, interest rates steady

November 20, 2016 5:42 pm


* Egyptian pound weakened as banks scrambled to meet surge in demand for dollars

* Pound had also weakened on the parallel market where prices were roughly in line with banks

* Egypt floated the pound on November 3 and raised interest rates by 300 basis points

The Egyptian pound weakened significantly on Sunday as banks scrambled to meet a surge in demand for dollars and the central bank held benchmark interest rates steady.

The pound was trading at between 17.25 and 17.75 against the dollar by 1138 (0938 GMT), after closing at nearly 16.05 on Saturday.

Pent-up demand

“There is a lot of pent up demand (for dollars)… There are people who are willing to buy at any price and they are mainly importers of non-essential goods,” said one banker.

Another banker echoed those comments, saying the pound had also weakened on the parallel market where prices were roughly in line with those at the banks.

Sunday’s drop comes after six bankers told Reuters over the weekend that the central bank had informed them verbally that they could supply dollars to importers of non-essential goods provided they prioritise basic imports and obtain the dollars they need on the interbank market.

Dramatic move

Egypt floated the pound on November 3 and raised interest rates by 300 basis points in a dramatic move welcomed by businesses as the key to unlocking investment.

It devalued the currency by about a third from the former peg of 8.8 against the dollar and allowed it to drift lower.

Egypt’s dollar peg had drained the central bank’s foreign reserves, which have been hit by reduced foreign investment following political turmoil in the past few years, forcing the bank to impose capital controls and ration dollars.

That prompted desperate importers to turn to a burgeoning black market where the dollar at one point fetched more than twice its official value.

A severe shortage of dollar liquidity when markets opened for the first time after the float had resulted in low volumes and saw the pound weaken to 18 versus the dollar.

The currency strengthened to roughly 15.50 after it became clear that the International Monetary Fund would approve Egypt’s $12 billion lending programme to support government reforms.

Since the float, more companies have gone to the banks for their dollars, leaving them scrambling for funds while a lack of liquidity means interbank trading got off to a slow start.

Banks have focused on buying up dollars from the informal sector and supplying them to clients rather than selling them on the interbank market.

The central bank’s Monetary Policy Committee held benchmark interest rates steady at its meeting on Thursday.

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Reuters
By Reuters
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