- Gap remains between official and black market rates
- Egypt promised currency flexibility for IMF deal
- Dollar shortage led to pent-up demand for imports
According to Reuters article published on January 5, 2023, Egypt's currency weakened on Thursday by about 2.3% against the U.S. dollar, though bankers said trading was thin and demand for dollars high following the third effective devaluation of the pound in less than a year.
The pound closed at 27.11 per dollar, according to the central bank, after fluctuating more than usual. Black market dealers on the street were offering 30.5 pounds to the dollar.
On Wednesday the pound slid by 6.34%, according to central bank figures, its biggest one-day move since October when it was last allowed to drop sharply as a new financing package with the International Monetary Fund was announced. The pound has weakened by 42.4% over the last year.
Currency flexibility was a key component of the 46-month, $3 billion financial IMF package.
"This is a heavily managed exchange rate and the decline is taken as a controlled move by local authorities," said Chris Turner of ING.
A year ago the pound traded in a tight band below 16 per dollar. After the central bank allowed the pound to depreciate sharply last March and October, it soon resumed trading within a band, moving only about 0.01 pounds per dollar per day.
"In our view, recent movements may represent final steps towards a more flexible exchange rate regime in Egypt, perhaps akin to a managed float," said JP Morgan's Ayomide O Mejabi.
Egypt's international market government bonds gave back some of Wednesday's gains, while non-deliverable forwards (NDF) that traders use to price in future currency moves forecast further falls for the pound in the next 3-12 months .
HUGE BACKLOG
Despite last year's devaluations a shortage of foreign currency has continued to hamper imports in recent months.
In an attempt to ease the import crunch, authorities announced last week they had phased out restrictions on access to import financing that had been in place since February.
On Thursday, two bankers said trade in the pound was thin and demand for dollars remained high as banks struggle to clear a huge backlog of orders.
The demand for dollars includes a mix of imports both already on their way and others newly ordered, one of the bankers said.
Egypt was already under financial pressure when the war in Ukraine began, hurting tourism revenues, raising commodity import bills and leading foreign investors to pull more than $20 billion out of the country.
Deutsche Bank said in a note that Wednesday's devaluation and an interest rate hike by the central bank last month "clearly show an approach to re-attract (structural) foreign inflows into local markets".
As the pound fell on Wednesday, state-owned banks introduced one-year savings certificates bearing a 25% return.
These should suck liquidity out of the market while helping some Egyptians protect savings against an expected surge in inflation, which is already at five-year highs.
There were long queues outside banks on Thursday to snap up the certificates.
"I have a bit of savings so I thought I should do it," said one man who gave his name as Rami and was queuing outside a bank in Cairo with his wife. He said he was searching for employment after returning from abroad a couple months ago.
"I don't really have other options. The return is very good of course," he said. "What's happening with prices is known. It's really bad," his wife added.
