Egypt’s central bank will allow new currency derivatives to unlock liquidity in the local market, making available instruments to hedge against risks to the pound currency after it drops against the U.S. dollar.
Under the plan, domestic lenders are set to introduce onshore non-deliverable forwards, or NDF contracts, and options that enable companies and investors for the first time to bet on or hedge against swings in the Egyptian currency, people with direct knowledge of the matter told Bloomberg on Sunday.
The move aims to build a more transparent local market with the credibility to guide expectations on currency movements, added the people, who asked not to be identified because the information is not yet public.
Carrying out the plan would provide local firms with a way to protect against bigger swings in the local currency should Egypt adopt a looser exchange rate. Until now, local banks in the country were only able to deal in foreign currency at the spot rate.
Greater currency flexibility has emerged as one of the main issues in Egypt’s talks with the International Monetary Fund (IMF) as it moves closer to clinching an agreement. Egyptian officials are traveling to Washington next week to take part in the IMF and World Bank annual meetings.
Further details of the plan still remained unclear as Bloomberg could not reach central bank officials for comment.
“Egypt’s foreign-exchange market required new products a while ago,” Bloomberg quoted Hisham Ezz Al-Arab, senior adviser to the central bank’s acting governor, as saying, but added that he spoke in his personal capacity.
“Such derivatives always boost market liquidity,” Ezz Al-Arab noted. “Any products such as equities, commodities, interest rates or even foreign exchange always benefited from hedging tools, which improve the market’s depth.”
While the local market for forwards contracts, introduced years ago, has been inactive, Egyptian banks such as Banque Misr have already made them available on the Bloomberg terminal for durations ranging from one week to a year. The contracts are deals in which assets are bought and sold at pre-determined prices for future delivery.
The latest initiative marks another move by Central Bank Governor Hassan Abdalla, who long seen as a supporter of a stable pound.
Some of the world’s biggest banks have said the Egyptian pound is still too expensive and the IMF would demand a looser exchange rate — even after the central bank depreciated it by more than 10 percent in March. The government has already conceded a more flexible currency is necessary to support the local economy that’s grappling with a shortage of dollars.
The pound has been moving weaker in small increments and hit a record low against the U.S. dollar in the offshore market on Tuesday.
Traders have also resumed betting for a bigger depreciation, according to NDFs traded offshore, after paring those wagers in the wake of the central bank’s unexpected decision to hold interest rates steady in late September.
NDFs are agreements between counterparties to buy or sell a currency at a pre-determined rate in the future yet without actually exchanging the currency. At maturity, profits or losses are netted through calculating the difference between the NDF rate agreed upon and the market rate at the time.
Egypt, one of the world’s biggest importers of wheat, was among emerging economies vulnerable to the repercussions of the Russian war in Ukraine.
