Egypt’s central bank strengthened the pound on Wednesday for the first time since 2013, injecting dollars into a banking system suffering from an acute foreign exchange shortage and raising expectations of a radical shift in monetary policy.
The central bank raised the pound’s official value by 0.20 pounds to 7.7301 to the dollar, surprising bankers who had been expecting a depreciation to ease a long-running currency crisis that has hit trade and industry and spooked investors.
Heavily dependent on imports for food and energy, Egypt has seen a burgeoning black market for dollars.
Although it has allowed a gradual depreciation of the official rate of about 11 percent this year, a significant gap still remains with the black market rate which was about 8.7 pounds on Wednesday.
In February, the central bank also imposed capital controls, limiting to $50,000 a month the amount of dollars that can be deposited in banks, in a bid to suck liquidity from the black market.
Those restrictions have made it difficult for companies to open letters of credit and pay for imports that have been building up at ports.
But last week Egypt’s top two state banks, Banque Misr and the National Bank of Egypt (NBE), said they would provide dollars to cover import demands for businesses with bankers saying the infusion came from the central bank and was aimed at reducing pressure on the pound.
Bankers said Wednesday’s move is a further step in this direction, though the complex mechanics have caused confusion.
At least four bankers said the central bank had offered to supply an undisclosed amount of dollars directly to banks on Wednesday at the new stronger rate. This aimed to help banks cover a quarter of the ballooning dollar overdrafts they had opened up for clients hit by the dollar shortage.
In return, they expect the central bank to ask them to make dollar deposits to boost its own flagging foreign reserves.
The move drew conflicting reactions from the market, with some slamming it as dangerous and others predicting that the central bank was laying the ground for a major devaluation, a loosening of the peg or a full flotation.
EFG-Hermes said the move would not boost dollar liquidity but would reduce forex risks at banks ahead of a devaluation.
“We see this move, in addition to the recent decision to hike deposit rates by leading state-owned banks, as paving the way for a near-term movement of the EGP,” it said in its note. “The gradual cover of these positions minimizes the cost of any near-term weakening of the EGP for the business community.”
On Saturday, Banque Misr and NBE raised interest rates on Egyptian pound certificates to 12.5 percent from an average 10 percent, forcing other lenders to follow suit.
That surprise step ignited speculation that the central bank might soon hike official interest rates to defend the pound.
Hany Genena, head of research at Pharos Securities Brokerage, said the central bank was following a text book strategy used by countries seeking to break the pattern of depreciation ahead of a flotation.
“This is a transition phase to get the black market dealers to stop speculating and get out of the business and those holding on to dollars to sell them to the banks. Then the central bank can free float,” Genena said.
CONFUSION IN THE MARKET
Egypt already faces growing uncertainty over the direction of monetary policy with the planned departure of central bank governor Hisham Ramez, whose term ends on Nov. 26.
He will be replaced by veteran banker Tarek Amer, who has already begun meeting major banks and captains of industry.
In a move interpreted in the market as an effort to distance himself from Wednesday’s revaluation, Ramez told Al Youm Al Sabaa newspaper that he had appointed Gamal Negm as a caretaker governor.
Genena said the central bank followed a similar pattern of bank rate hikes and revaluations in 2004 and 2005 when Amer was a senior figure at the central bank, though the policy at the time did not culminate in a float.
Egypt’s economy has been struggling since a popular uprising in 2011 drove foreign investors and tourists away, putting a strain on the country’s foreign reserves, which have more than halved since the revolt to $16.4 billion – enough to cover just three months of imports.
Last week’s Russian airliner crash may also undermine the pound by cutting hard currency tourism revenues.
The source of the funds for Wednesday’s shift remains unclear. If the funds were sourced from foreign reserves, the amount will move from the assets to the liabilities column in their next disclosure.
If not, it will raise speculation that Egypt is expecting to receive a new round of aid. Egypt received billions of dollars in aid from the Gulf since mid-2013, including in the form of central bank deposits.
“All the world’s currencies right now are weakening against the dollar, and yet we are strengthening the pound…this means we’re losing competitiveness,” Hany Tawfik, chairman of the Egyptian Private Equity Association, told Reuters.
“Investors hate surprise…we want a clear vision for monetary policies and decisions.”
Source: Reuters
