Egyptian pound continues decline on black market Wednesday

Reuters , Wednesday 6 Apr 2016

A customer counts his U.S. dollar money in a bank in Cairo, Egypt (Photo: Reuters)

The Egyptian pound dropped again against the dollar on the black market on Wednesday, extending its recent decline despite central bank efforts to close the gap between demand and supply in the dollar-starved economy.

Egypt, which relies heavily on imports, is facing a shortage in foreign currency inflows after a 2011 uprising drove tourists and foreign investors away, causing the country's reserves to tumble to $16.56 billion from $36 billion.

Black market traders who quoted 10.10 pounds per dollar on Tuesday raised their rates to a range of 10.15-10.20 per dollar on Wednesday, 11 traders told Reuters on Wednesday. It stood at 9.9 per dollar on March 29.

A black market for dollars has sucked up liquidity from the banking system while the central bank kept the pound artificially strong and rationed dollars through weekly auctions, putting a strain on foreign reserves.

In an attempt to close the gap between official and black market rates, the central bank devalued the currency to 8.85 per dollar from 7.7301 last month. It later strengthened it to 8.78 per dollar, while adopting a more flexible exchange-rate policy.

"I think the difference between the black market rate and the official rate is a function of two things: the first is that the official rate may have not yet reached an equilibrium while the other is just speculation," said Ziad Waleed, economist at Beltone Financial.

One black market trader told Reuters on Tuesday that there were expectations of another devaluation and that this contributed to increased demand for dollars.

Demand on the black market skyrocketed after the central bank eased caps on dollar deposits at banks last month, allowing importers unable to source dollars from banks to resort to the black market for the dollars they need to import.

In an attempt to crack down on the black market, central bank governor Tarek Amer reported 15 exchange bureaus to the prosecutor general's office, accusing them of hoarding dollars and contributing to Egypt's currency crisis.

Egypt is expecting additional inflows of dollars ahead of a visit by Saudi Arabia's King Salman on Thursday . He is expected to sign a $20 billion deal to finance Egypt's petroleum needs for the next five years and a $1.5 billion deal to develop its Sinai region.

Saudi businessmen are also expected to invest around $4 billion in Egypt through projects including the Suez Canal, energy and agricultural projects.

"Once the dollars come in you will find that the black market rate will fall." Waleed said. "For the short term I don't think black market rates would disappear, not until fresh funds come in."

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