Monday,20 August, 2018
Current issue | Issue 1271, (19-25 November 2015)
Monday,20 August, 2018
Issue 1271, (19-25 November 2015)

Ahram Weekly

Pound gaining ground?

A surprise move to raise the value of the pound against the dollar coincided with increased demand for new bank products, reports Ahmed Kotb

Al-Ahram Weekly

The Central Bank of Egypt (CBE) decided on 11 November to raise the Egyptian currency’s value by LE0.20, to be priced at LE7.73 against the dollar, after it was devalued twice in October to reach LE7.93. The CBE pumped $1 billion into banks last week to cover payments for products and raw materials imported over the last few months.

The surprise move came amid expectations that the pound would officially reach LE8.50 by the end of 2015, especially since the high cost of supporting the pound against the dollar cannot be sustained by the CBE, which is struggling to cover demand for the dollar in the market.

The CBE has been using dwindling foreign reserves to meet demand for the dollar. Reserves were $16.4 billion at the end of October, down from $18 billion a couple of months earlier and down from $36 billion in January 2011. Before last week’s intervention by the CBE, the dollar had been trading at LE8.5 on the black market.

By revaluing the dollar in current economic conditions, according to Salama Al-Khouly, an economist at the National Bank of Egypt (NBE), the CBE is trying to pressure dollar holders to sell their greenbacks.

This would increase the supply of dollars available in banks and decrease the supply now circulating on the black market. When the CBE devalued the pound last month, to a record low of LE7.93, the decision was taken to balance official and black market prices.

Although the move at first helped toclose the gap between official and black market prices, high dollar demand widened the gap once again, the rate rising to around LE8.40 by Tuesday. Dollars are not readily available to cover all demand, which is why Ahmed Salah, manager of Al-Reda Exchange, believes “the gap cannot be controlled these days.”

Egypt has suffered a dollar shortage for several years because of decreasing revenue from its main foreign currency earners, such as tourism, which has been hard hit by unrest and terrorism. The tourism sector earned around $7 billion in fiscal year 2014-2015, well below the $11 billion earned in 2010.

CBE’s efforts to rein in the foreign currency black market, including a decision to limit dollar deposits to $50,000 per month, impacted exporters and local manufacturers who are suffering from restricted access to the hard currency.

Salah said that the dollar shortage has greatly limited buying and selling, but increasing the pound’s value only partially encouraged some dollar holders to sell. Still, he added, many believe that the pound will fall in value again in the coming few weeks because of the lack of dollar revenues and speculators, people waiting for the next drop to make higher profits when they sell their dollars.

Al-Khouly anticipates that the pound will be devalued again, to reach LE9 against the dollar, by the beginning of 2016, mainly because the high demand cannot be covered by banks.

The CBE decided to raise the value of the pound to LE7.73 against the dollar only days after Egypt’s biggest three national banks launched new savings certificates in Egyptian pounds, with an annual interest rate of 12.5 per cent — about 2.5 per cent higher than average.

Demand on certificates was very high, attracting about LE35 billion by Monday. Officials at the three banks, the National Bank of Egypt, Banque Misr and Banque du Caire, believe the move aims at encouraging dollar holders to exchange their dollars into pounds and deposit their money in banks, as well as controlling inflation rates.

Eman Mohamed, a professor of economics at Ain Shams University, praised the move which she believes will help support the Egyptian pound and the country’s hard currency reserves.

“Dollar holders are selling it to buy pounds and then buy new savings certificates,” Mohamed said. She added that increasing the interest rate is an essential move to help ease the demand on the dollar, especially after the anticipated drop in tourism following the Russian plane crash.

Al-Khouly, however, believes that the number of dollar holders who have given the currency up in favour of the pound is not very high. “Many people are aware that sooner or later the pound will depreciate again,” he said.

They know Egypt’s hard currency revenues are currently weak, which means they will hold on to the dollars to make more profits when its value increases against the pound.

Al-Khouly added that high demand on the new savings certificates is mainly due to bank clients switching from other savings services to the new certificates to benefit from the higher interest rate. “The number of people who have liquid money is not that large,” he said.

Although the move might help make more money available to banks in the short term, the banks are worried that loans are now less attractive: interest rates on loans were increased by the banks to cover the higher interest rates paid on the new certificates.

Mohamed believes the CBE might take a decision next month, when its monetary policy committee meets, to increase interest rates across the board before it takes any further steps to devalue the pound.

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