News / Economy

Egypt's Currency Black Market Under Threat as Confidence Rises

FILE - A man displays a 100 U.S. dollar and 50 Egyptian pound notes in Cairo.
FILE - A man displays a 100 U.S. dollar and 50 Egyptian pound notes in Cairo.
Reuters
Egypt's currency black market is under threat from two directions, as aid from wealthy Gulf states promises to ease a dollar shortage and an increasingly confident central bank engineers a gradual depreciation of the Egyptian pound.
 
Since the 2011 revolution ushered in three years of political and economic turmoil, a gap has opened up between the pound's official market rate and the weaker rate at which it trades in illicit money changing shops and back alleys.
 
The gap is a symbol of Egypt's economic weakness as it struggles to attract hard currency. Now, however, the pound is rising on the black market as traders anticipate fresh inflows of cash from Gulf Arabs who backed last year's military move to end Islamist rule. Gulf states have welcomed the election as president last week of former army chief Abdel Fattah el-Sissi.
 
Meanwhile, the central bank has been guiding the pound lower in the official market, apparently judging that the economy has stabilized enough for it to undertake this process without triggering an uncontrollable run on the currency.
 
The result, black market dealers and bank economists say, is that the gap between the two rates may vanish as early as the end of this year, making back-street trading all but superfluous. The spread was 2.7 percent on Wednesday, down from 4.7 percent last week and over 10 percent early last year.
 
“If there's more money coming in from the Gulf, there won't be a thing called the black market,” a middle-aged trader, dressed in a worn-out gray sweater and black trousers, said in a luggage shop in Cairo's crowded Ataba district where he conducts his illicit - and anonymous - currency business.
 
Simon Williams, chief Middle East economist for HSBC in Dubai, said he suspected Egyptian authorities believed the country could now afford to let the pound fall in the official market to levels which attract healthy supplies of dollars.
 
“It's a sign of confidence - they think they can loosen their grip now and return to a normal regime,” he said.
 
Black market
 
The pound is officially trading between banks at 7.15 to the dollar, some 15 percent weaker than it was near the end of 2012, when the central bank introduced an auction system for dollars in order to ration hard currency and protect its reserves.
 
Banks must trade dollars within ranges around the central bank's auction cut-off prices for interbank, commercial and retail transactions, giving authorities effective control over the official exchange rate.
 
However, monthly demand for dollars in Egypt is over half a billion dollars greater than the amount supplied by the official market, economists estimate. The black market has sprung up to satisfy this demand.
 
There are now expectations that aid and investment from the Gulf may shift the supply-demand balance in the black market considerably - expectations fuelled by Saudi Arabia's King Abdullah, who said on Tuesday that countries should hold an aid donors' conference for Egypt.
 
It is not clear how much money Egypt will get or when. But the statement was a fresh signal that three of the world's richest countries, Saudi Arabia, the United Arab Emirates and Kuwait, view stabilizing Egypt as a geopolitical imperative.
 
The three governments have already pledged at least $12 billion in aid - and delivered most of it - since the Egyptian army ousted president Mohamed Morsi of the Muslim Brotherhood, whom Gulf states viewed as an ideological arch-enemy, last July.
 
Similar or larger aid amounts are possible in coming months or years as the Gulf shores up Sissi. The Gulf is also encouraging its state-owned companies to make big investments in Egypt, in areas from housing to energy.
 
“The expectation is that Sissi will fix the country and will bring in investments,” said another Cairo black market trader, declining to be named because he did not want to attract the attention of authorities.
 
He and others said the pound was now trading at around 7.35 to the dollar, much stronger than its rate of 7.50 just last week, and lows of near 8.00 during Morsi's rule.
 
Official market
 
As long as Egypt's tourism industry and overall economy remain weak, Gulf money looks unlikely by itself to supply enough dollars to close the black market entirely.
 
The country posted a huge trade deficit of $15.4 billion between last July and December, and as tourism revenues were hit by security fears, its services surplus almost disappeared. Gulf aid received so far has halted a slide in the central bank's foreign reserves but has not boosted them significantly.
 
That is where central bank policy comes in. Since the end of March, when the official exchange rate was at 6.97, the central bank has been choosing cut-off prices in its dollar auctions that have had the effect of pushing the pound down very slowly.
 
This appears to be a major shift in policy - not confirmed by officials - since restoring currency stability was a priority and a major achievement for authorities after the pound's wild depreciation under Morsi. That alarmed investors and caused them to send hundreds of millions of dollars out of the country.
 
An informal Reuters survey of 10 traders, fund managers and economists in Egypt and abroad found eight of them predicting the pound's official rate would fall further by the end of this year, to an average rate of 7.35; that would mean a total depreciation of 5.4 percent during 2014. Further moderate depreciation is seen as possible next year.
 
So far, central bank officials have not commented publicly on the reasons for the policy change, and officials familiar with currency policy could not be reached for comment.
 
But many private economists think authorities have two goals in mind. One is to boost economic growth, a priority for Sissi to keep popular support, by stimulating exports; trade minister Mounir Fakhry Abdel Nour has said Egypt wants non-oil exports to rise 15 percent this year, after 11 percent in 2013.
 
Trade is unlikely to be the main motive for the policy change. Egypt's export sector accounts for only slightly more than 10 percent of the economy, and if a weak currency pushes up food price inflation, support for the government could suffer.
 
The main reason appears to be a desire to bring the pound down to a level which financial markets believe is good value, and therefore sustainable in the long run. That could persuade portfolio investors and companies from around the world, not just the Gulf, to resume putting money into Egypt.
 
Last year, Egypt's economy was so shaky that even starting a depreciation process could have triggered an uncontrollable market panic. Now, the market and the central bank, backed by Gulf aid, have more confidence that the process can be managed.
 
“They are managing a depreciation to encourage people into the market to bring in FDI [foreign direct investment],” said Allen Sandeep, research head at Cairo's Naeem Brokerage, adding that the level at which the pound eventually stabilized would depend on how quickly tourism revenues recovered.
 
If the black market does disappear and the central bank is able to end its dollar rationing system, returning to a relatively free market in which supply and demand balance, it would send a very positive signal to investors.
 
“Currency weakness will help exports, but normalization of the FX regime is more important than that,” said Williams at HSBC. “It shows the pound is convertible again, that the crisis is over and that Egypt is investable once again.”

You May Like

US Border Patrol Union Accused of Taking Sides on Immigration

Report alleges agents leaking info to immigration opponents, appearing at their private events; Center for Immigration Studies director defends agents' actions More

Video Blind Somali Journalist Defies Odds in Mogadishu

Reporting from Somali capital for past decade, Abdifatah Hassan Kalgacal has been working at one of Mogadishu's leading radio stations covering parliament More

Video Rights Monitor: Hate Groups' Use of Internet to Inflame, Recruit Growing

Wiesenthal Center's Abraham Cooper says extremists have become skilled at celebrating violence, ideology on Web More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Hate Groups Spread Influence Via Interneti
X
Mike O'Sullivan
June 30, 2015 8:20 PM
Hate groups of various kinds are using the Internet for propaganda and recruitment, and a Jewish human rights organization that monitors these groups, the Simon Wiesenthal Center, says their influence is growing. The messages are different, but the calls to hatred or violence are similar. VOA's Mike O’Sullivan reports.
Video

Video Hate Groups Spread Influence Via Internet

Hate groups of various kinds are using the Internet for propaganda and recruitment, and a Jewish human rights organization that monitors these groups, the Simon Wiesenthal Center, says their influence is growing. The messages are different, but the calls to hatred or violence are similar. VOA's Mike O’Sullivan reports.
Video

Video US Silica Sand Mining Surge Worries Illinois Residents, Businesses

Increased domestic U.S. oil and gas production, thanks to advances known as “fracking,” has created a boom for other industries supporting that extraction. Demand for silica sand, used in fracking, could triple over the next five years. In the Midwest state of Illinois, people living near the mines are worried about how increased silica sand mining will affect their businesses and their health. VOA’s Kane Farabaugh has more in this first of a series of reports.
Video

Video Blind Somali Journalist Defies Odds in Mogadishu

Despite improving security in the last few years, Somalia remains one of the most dangerous countries to be a journalist – even more so for someone who cannot see. Abdulaziz Billow has the story of journalist Abdifatah Hassan Kalgacal, who has been reporting from the Somali capital for the last decade despite being blind.
Video

Video Texas Defies Same-Sex Marriage Ruling

Texas state officials have criticized the US Supreme Court decision giving same-sex couples the right to marry nationwide. The attorney general of Texas says last week's decision did not overrule constitutional "rights of religious liberty," and therefore officials performing wedding services can refuse to perform them for same-sex couples if it is against their religious beliefs. Zlatica Hoke reports on the controversy.
Video

Video Syrians Flee IS Advance in Hasaka

The Syrian government said Monday it has taken back one of several districts in Hasaka overrun by Islamic State militants. But continued fighting elsewhere in the northern city has forced thousands of civilians from their homes. In this report narrated by Bill Rodgers, VOA Kurdish Service reporter Zana Omer describes the scene in Amouda, where some of the displaced are taking refuge.
Video

Video Rabbi Hits Road to Heal Jewish-Muslim Relations in France

France is on high alert after last week's terrorist attack near the city Lyon, just six months after deadly Paris shootings. The attack have added new tensions to relations between French Jews and Muslims. France’s Jewish and Muslim communities also share a common heritage, though, and as far as one French rabbi is concerned, they are destined to be friends. From the Paris suburb of La Courneuve, Lisa Bryant reports about Rabbi Michel Serfaty and his friendship bus.
Video

Video S. Korea Christians Protest Gay Rights Festival

The U.S. Supreme Court decision mandating marriage equality nationwide has energized gay rights supporters around the world. Gay rights remain a highly contentious issue in a key U.S. ally, South Korea, where police did a deft job Sunday of preventing potential clashes between Christian protesters and gay activists. Kurt Achin reports from Seoul.
Video

Video Saudi Leaks Expose ‘Checkbook Diplomacy’ In Battle With Iran

Saudi Arabia’s willingness to wield its oil money on the global diplomatic stage appears to have been laid bare, after the website WikiLeaks published tens of thousands of leaked cables from Riyadh’s Ministry of Foreign Affairs. VOA's Henry Ridgwell reports.
Video

Video Nubians in Kenya Face Land Challenges

East Africa's ethnic Nubians have a rich cultural history that dates back thousands of years, but in Kenya they are facing hardships, including the loss of lands they have lived on for generations. They say the government has reneged on its pledge to award them title deeds for the plots. VOA's Lenny Ruvaga reports.
Video

Video Military Experts Question New Russian Tank Capabilities

Russia has been showing off its new tank design – the Armata T-14. Designers claim it is 20 years ahead of current Western designs - and driving it feels like playing a computer game. But military analysts question those assertions, and warn the cost could be too heavy a burden for Russia’s struggling economy. Henry Ridgwell reports.
Video

Video In Kenya, Police Said to Shoot First, Ask Questions Later

An organization that documents torture and extrajudicial killings says Kenyan police were responsible for 1,252 shooting deaths in five cities, including Nairobi, between 2009 and 2014, representing 67 percent of all gun deaths in the areas reviewed. Gabe Joselow has more from Nairobi.
Video

Video In Syrian Crisis, Social Media Offer Small Comforts

Za’atari, a makeshift city in Jordan, may be the only Syrian refugee camp to tweet its activities, in an effort to keep donors motivated as the war in Syria intensifies and the humanitarian crisis deepens. Inside the camp, families say mobile phone applications help hold together families that are physically torn apart. VOA’s Heather Murdock reports.

VOA Blogs

World Currencies

EUR
USD
0.8982
JPY
USD
122.88
GBP
USD
0.6363
CAD
USD
1.2374
INR
USD
63.836

Rates may not be current.