Chasing the dollar

Niveen Wahish , Tuesday 2 Jan 2024

Efforts to stem the parallel market for dollars are continuing, reports Niveen Wahish

The gap between the official and parallel market exchange rate is growin
The gap between the official and parallel market exchange rate is growin


In an effort to keep pace with the latest international standards for combating money laundering, the Central Bank of Egypt (CBE) issued new regulations during the last week of December that include a list of indicators to identify operations suspected of involving money laundering.

The regulations set guidelines to monitor suspicious cash operations, transfers, trade finance, lending, and use of credit cards and electronic wallets. The new rules, which the banks have six months to implement, cancel the CBE’s decision in July to allow the deposit of any amount of hard currency without asking questions as to its origins.

The move in July was intended to attract much-needed hard currency into the banking system. But seeing that that decision was not very effective in attracting a suitable foreign currency inflow, despite the existence of high yield saving certificates on offer, it was important that the regulator act dynamically in tandem with domestic and international economic developments, explained Omar Elmekkawy, deputy head of enterprise risk management at the Banque du Caire in Cairo.

He said there was a problem with people hoarding dollars, driving up the exchange rate on the parallel market and making it necessary for the CBE to take action. While trading at around LE31 officially, the dollar has reached as high as LE56 on the parallel market.

“The pound’s decline has been fuelled by public behaviour,” Elmekkawy said.

Banking consultant Gamal Wagdy agrees. “The parallel market is out of control, driven by expectations of an impending devaluation,” he said. Attempts to control the sources of the parallel market have thus far failed, so the CBE is targeting the exit channels for that money, he added.

The surge in the value of the dollar on the parallel market is affecting other goods. Traders and manufacturers are calculating the price of their goods accordingly, and gold prices have multiplied for the same reason, Wagdy said.

An ounce of 24 karat gold was selling for around LE64,000 on Tuesday, around 14 per cent above the LE56,000 price on 6 October 2023, according to the Gold Rate 24 website. Many people are choosing to buy gold to protect their savings against a further drop in the value of the local currency.

The CBE has also issued instructions to the banks that credit cards issued on or after 21 December will not be allowed to make foreign-currency transactions, the online news website Enterprise reported.

Demand has surged since October for credit cards in order to bypass a ban the CBE had earlier placed on the use of debit cards for hard-currency transactions.

While the CBE decisions were needed, both experts said that more should be done. Elmekkawy emphasised the importance of facilitating investment and streamlining bureaucracy to attract foreign direct investment (FDI) and improve Egypt’s Ease of Doing Business ranking.

However, Wagdy said that while economic reform is the ultimate solution, and growing exports would ensure a steady flow of hard currency, this was a process that needed time.

“Surgical solutions like import restrictions are what are needed at the moment,” he said.

In order to dry up some of the demand for hard currency, Egypt should limit unnecessary imports. The country’s international trade agreements allow it to do so should it experience pressure on its balance of payments, he explained.

However, he said that any such action should be done in a transparent manner and with enough time for importers to adjust. He understood that it would hurt importers’ business but noted that there were winners and losers in every economic decision.

While delaying a currency devaluation could augment the problem, because the gap between the official and parallel dollar rate was getting bigger, a devaluation was not a solution in itself, Wagdy said.

 “Unless there are enough reserves to meet the demand for hard currency, any drop in the value of the dollar would only be temporary,” he said.

Elmekkawy does not foresee a devaluation unless the CBE has enough funds to meet importers’ requests for hard currency, since “otherwise the parallel market would persist.”

But he was optimistic that once there was a devaluation, those hoarding dollars would be encouraged to sell them to the banks, pushing the dollar price down. He said that at the same time interest rates should be lowered to decrease the cost of finance and increase appetite for credit and encourage investment.

Meanwhile, savings certificates at attractive rates of 25 per cent and 22.5 per cent should be offered to individuals to encourage them to convert their dollars to buy these instruments.

The US central bank the Federal Reserve’s decision to hold rates steady for the third time in a year and its indication that it could cut rates three times in 2024 could also encourage portfolio investors back to Egypt and provide an additional inflow of hard currency.

Rate hikes in the US since 2022 have attracted investors away from emerging markets, including Egypt. Some $20 billion of portfolio investments fled the country in 2022.

Elmekkawy stressed the need to prioritise the control of inflation and praised the government’s efforts to regulate the price of essential goods.

This week Prime Minister Mustafa Madbouli designated seven commodities as strategic products, thereby prohibiting their stockpiling by merchants for six months and requiring that producers print prices on packages to prevent any arbitrary pricing by traders.

The move aims to put a break on inflation, which currently stands at around 34 per cent.

* A version of this article appears in print in the 4 January, 2024 edition of Al-Ahram Weekly

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