Interpreting Middle East Economic News and Analyzing Market Trends

Egypt’s shrinking foreign currency reserves, devaluation is inevitable

Two years since the revolution in Egypt threw out Hosni Mubarak, the Egyptian economy is still attempting to recover.  Recovery has a long way to go.  Recent news of a run on the Egyptian pound sheds some light on the predicament the country faces:

 

A run on Egypt’s pound has left foreign currency in short supply and driven some dealers into the streets in search of people with U.S. dollars to sell, spawning a new black market.

The currency’s decline was triggered by a political uprising that swept Hosni Mubarak from power in 2011 and it has officially lost 8 percent of its value since Dec. 30.

Black market rates are even weaker, a sign that although the central bank managed to stem the slide in official trade last week, Egyptians are nervous about holding on to pounds.

Some dealers tout discreetly outside regulated foreign exchange bureaux and banks in Cairo, illegally offering a better rate to those looking to sell hard currency.

“There are no dollars. Everyone that walks in asks for dollars but supply is scarce,” said one of the dealers.

The central bank took steps last week to manage the rate including narrowing the pound’s trading band. It was last bid at 6.71 to the dollar on Sunday in interbank trade.

That is 13.4 percent weaker than its level on the eve of the uprising that led to Mubarak’s downfall, pitching Egypt into two years of turmoil that has scared off tourists and investors.

On Cairo’s streets, one dealer offered to sell dollars at a rate of 6.95 on Thursday – 3.5 percent weaker than the official price. Another asked for 6.89 pounds to the dollar.

The pound’s decline has been reflected in a drop in Egypt’s foreign reserves, which fell to $13.6 billion at the end of January – below the $15 billion level needed to cover three months’ imports. The reserves stood at $36 billion on the eve of the uprising against Mubarak.

Complicating a business climate already weighed down by political unrest, some importers say they are having to source their foreign exchange needs from what they call the parallel or open market.

One senior executive at an Egyptian company that imports goods from abroad said companies were able to source their dollar needs from the black market, but forecast that supply would tighten further in the coming weeks.

“Corporates are not having problems arranging for U.S. dollars from the open market. However, there is a spread that ranges between 16 to 20 piasters between the bank rates and the open market,” he said.

Speaking on condition of anonymity because he was discussing an illegal market, he forecast that dollar supply would dry up further because of factors such as political uncertainty.

“What will happen? Most probably you will start seeing products disappearing from supermarket shelves,” he said. “The challenges that we are facing now are nothing compared to what we could be heading to.”

CENTRAL BANK GOVERNOR NOT WORRIED

Central bank governor Hisham Ramez has said he is not worried about the emergence of a black market.

Bonook El Youm, a weekly supplement published by the financial daily Al-Alam Al-Youm, quoted him as saying he is confident the authorities have the tools to eliminate it completely.

Protests continue in the country despite having a new constitution and a newly elected president.  Those who participated in the revolution hoping for a better life afterwards are quickly realizing that revolutions do not provide change fast as they thought.  Most Egyptians are struggling to feed them themselves.  Jobs are being lost by the economic slowdown.  Tourism, once the country’s mainstay for hard currency, is nowhere near where it used to be.  The current political and social unrest escalate at a time when the country needs to get the economy back on its feet.

Read the full article from Reuters.

Egypt faces enormous challenges.  A run on the currency is the least of the country’s problems.  Just as Venezuela did last week, a devaluation of the pound is inevitable at this point.  The Central bank governor publicly says he is not worried, but privately he’s losing a lot of sleep.  The longer the unrest last, the longer it will take the country to recover.  As it stands right now, there is no recovery as far as the eye can see.