The Central Bank of Egypt (CBE) has battled to rein in an emerging parallel market in currency exchange since 2011, when political turbulence saw the Egyptian pound lose 13.4% of its value against the US dollar, an occurrence which, in turn, greatly effected the wider economy. Hisham Ezz Al Arab, chairman and managing director of Commercial International Bank, told OBG, “Given that 70% of Egypt’s trade with non-US partners is conducted using dollars, the currency’s recent appreciation has had its impact on the competitiveness of Egyptian exports.”
Thanks to the reduction in dollar availability caused by the lower currency inflows from tourists and investors, the official central bank dollar rate diverged from the black market, directly affecting Egypt’s banks, particularly with regard to servicing the foreign currency requirements of corporate clients. At the end of 2013, as demand for dollars began to outstrip supply, the CBE introduced a new auction system to sell dollars from its foreign reserves to lenders. Although this move helped the government conserve its dwindling foreign reserves, it resulted in backlogs in foreign currency requests from bank customers. The CBE worked to resolve this issue, and was granted some assistance in this through large capital injections from regional allies. However, many of Egypt’s businesses had to resort to the parallel market to access dollars, which they deposited in local banks, where they could be used for essential processes such as opening letters of credit for imports.
In 2015 the CBE took steps to curb the unregulated parallel exchange system, placing strict limits on the amount of dollars that could be deposited in cash at banks, with a ceiling of $10,000 per day to a maximum of $50,000 per month. The CBE also allowed a rare devaluation of the Egyptian pound, which it had held steady at LE7.14:$1 from May 2014 to January 2015. The strategy seemed clear: with a lowered official rate, black market dealers would be able to sell their dollars to banks without suffering major losses, thus increasing the supply of hard currency in the banking system, and enabling it to service those customers who had hitherto been forced to use the black market.
Based on media reports, the plan met with early success. The spread between the official and black markets sank to virtually nothing from a high of around 10% two years before, and demand for dollars from local currency exchanges dropped dramatically. However, concerns remain that businesses are finding it hard to access dollars for letters of credit, a problem which, if sustained, will present a major challenge to economic development. “The deposit limits removed about 90% of the [parallel] market. But some small traders are suffering, particularly those dependent on importing raw material,” Mohammed Abdel Kader, director of fixed income, currencies and commodities at Citibank Egypt, told OBG.
As well as the formal restrictions on accepting foreign currency deposits, other tools are being rolled out. According to press reports in May 2015, at least one tranche of US dollars sold to banks came with the proviso that it be sold to food importers at a discounted rate of LE7.5501:$1, compared to an official interbank rate of 7.6301:$1.
The news came at a time when Egypt, the world’s biggest importer of wheat, was faced with a mounting inflation problem, with the consumer price index (CPI) in the 12 months to March 2015 showing an 11.5% increase. Food is a key driver of inflation growth, accounting for almost 40% of the nation’s CPI, and the rising price of staples does not sit well with a populace that has undergone an extended period of economic hardship and political instability.
While the government sets about guiding the country through its political transition and returning it to sustainable economic growth, it seems the banks are being asked to play their part in the process.