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

    Russian-speaking Muslim Exiles Fear Possible Russia-Turkey Thaw

    Exiled from Russia as Islamic radicals and extremists, thousands found asylum in Turkey

    US Presidential Election Ends at Conventions for Territorial Citizens

    Citizens of US territories like Guam or Puerto Rico enjoy participation in US political process but are denied right to vote for president

    UN Syria Envoy: 'Devil Is in the Details' of Russian Aleppo Proposal

    UN uncertain about the possible humanitarian impact of Russian proposal to establish escape corridors in Aleppo

    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.
    Uganda Unveils its First Solar-powered Busi
    X
    July 28, 2016 4:16 AM
    A solar-powered bus described by its Ugandan makers as the first in Africa has made its public debut. Kiira Motors' electric bus, Kayoola, displayed recently at a stadium in Uganda's capital. From Kampala, Maurice Magorane filed this report narrated by Salem Solomon.
    Video

    Video Uganda Unveils its First Solar-powered Bus

    A solar-powered bus described by its Ugandan makers as the first in Africa has made its public debut. Kiira Motors' electric bus, Kayoola, displayed recently at a stadium in Uganda's capital. From Kampala, Maurice Magorane filed this report narrated by Salem Solomon.
    Video

    Video Silicon Valley: More Than A Place, It's a Culture

    Silicon Valley is a technology powerhouse and a place that companies such as Google, Facebook and Apple call home. It is a region in northern California that stretches from San Francisco to San Jose. But, more than that, it's known for its startup culture. VOA's Elizabeth Lee went inside one company to find out what it's like to work in a startup.
    Video

    Video Immigrant Delegate Marvels at Democratic Process

    It’s been a bitter and divisive election season – but first time Indian-American delegate Dr. Shashi Gupta headed to the Democratic National Convention with a sense of hope. VOA’s Katherine Gypson followed this immigrant with the love of U.S. politics all the way to Philadelphia.
    Video

    Video Philadelphia Uses DNC Spotlight to Profile Historic Role in Founding of United States

    The slogan of the Democratic National Convention now underway in Philadelphia is “Let’s Make History Again” which recognizes the role the city played in the foundation of the United States in the 18th century. As VOA’s Kane Farabaugh reports, local institutions are opening their doors in an effort to capitalize on the convention spotlight to draw visitors, and to offer more than just a history lesson.
    Video

    Video A Life of Fighting Back: Hillary Clinton Shatters Glass Ceiling

    Hillary Clinton made history Thursday, overcoming personal and political setbacks to become the first woman to win the presidential nomination of a major U.S. political party. If she wins in November, she will go from “first lady” to U.S. Senator from New York, to Secretary of State, to “Madam President.” Polls show Clinton is both beloved and despised. White House Correspondent Cindy Saine takes a look at the life of the woman both supporters and detractors agree is a fighter for the ages.
    Video

    Video Dutch Entrepreneurs Turn Rainwater Into Beer

    June has been recorded as one of the wettest months in more than a century in many parts of Europe. To a group of entrepreneurs in Amsterdam the rain came as a blessing, as they used the extra water to brew beer. Serginho Roosblad has more to the story.
    Video

    Video First Time Delegate’s First Day Frustrations

    With thousands of people filling the streets of Philadelphia, Pennsylvania for the 2016 Democratic National Convention, VOA’s Kane Farabaugh narrowed in on one delegate as she made her first trip to a national party convention. It was a day that was anything but routine for this United States military veteran.
    Video

    Video Commerce Thrives on US-Mexico Border

    At the Democratic Convention in Philadelphia this week, the party’s presumptive presidential nominee, Hillary Clinton, is expected to attack proposals made by her opponent, Republican presidential nominee Donald Trump, to build a wall along the U.S.-Mexico border. Last Friday, President Barack Obama hosted his Mexican counterpart, President Enrique Peña Nieto, to underscore the good relations between the two countries. VOA’s Greg Flakus reports from Tucson.
    Video

    Video Film Helps Save Ethiopian Children Thought to be Cursed

    'Omo Child' looks at effort of African man to stop killings of ‘mingi’ children
    Video

    Video London’s Financial Crown at Risk as Rivals Eye Brexit Opportunities

    By most measures, London rivals New York as the only true global financial center. But Britain’s vote to leave the European Union – so-called ‘Brexit’ – means the city could lose its right to sell services tariff-free across the bloc, risking its position as Europe’s financial headquarters. Already some banks have said they may shift operations to the mainland. Henry Ridgwell reports from London.
    Video

    Video Recycling Lifeline for Lebanon’s Last Glassblowers

    In a small Lebanese coastal town, one family is preserving a craft that stretches back millennia. The art of glass blowing was developed by Phoenicians in the region, and the Khalifehs say they are the only ones keeping the skill alive in Lebanon. But despite teaming up with an eco-entrepreneur and receiving an unexpected boost from the country’s recent trash crisis the future remains uncertain. John Owens reports from Sarafand.
    Video

    Video Migrants Continue to Risk Lives Crossing US Border from Mexico

    In his speech Thursday before the Republican National Convention, the party’s presidential candidate, Donald Trump, reiterated his proposal to build a wall along the U.S.-Mexico border if elected. Polls show a large percentage of Americans support better control of the nation's southwestern border, but as VOA’s Greg Flakus reports from the border town of Nogales in the Mexican state of Sonora, the situation faced by people trying to cross the border is already daunting.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.9017
    JPY
    USD
    104.72
    GBP
    USD
    0.7594
    CAD
    USD
    1.3160
    INR
    USD
    67.046

    Rates may not be current.