Tuesday,17 July, 2018
Current issue | Issue 1318, (3 - 9 November 2016)
Tuesday,17 July, 2018
Issue 1318, (3 - 9 November 2016)

Ahram Weekly

What next for the pound?

With the US dollar now trading on the parallel market at double the official rate to the pound, Niveen Wahish gauges future prospects

Al-Ahram Weekly

You want dollars? Then you will likely be paying LE18 to buy one US dollar on the parallel market, or more than double the official rate of around LE9.

Will this be the value of the pound upon its expected devaluation? Not necessarily. “The next exchange rate move could be somewhere between LE11 to LE12 per dollar,” said a note by Pharos Securities Brokerage. 

Two elements are driving the increase in the dollar exchange rate on the parallel market, the first of them supply and demand. Since October 2015 following the Russian airplane crash in Sinai and the following flight bans, there has been a drop of around $5 billion in tourism revenues coming into Egypt, down from $7.2 billion the year before.

Remittances from Egyptians living abroad have also dropped by between $2 and $3 billion from $19.5 billion in 2015. Egypt has been importing liquefied natural gas (LNG) worth between $2 and $3 billion, a new addition to the country’s imports bill over the last year.

Overall, on the supply side calculations suggest an amount of roughly $10 to $11 billion in terms of lost revenues since October last year, due to lower tourism, the drop in remittances, and LNG imports, said Allen Sandeep, director of research at Naeem Brokerage.

 On the demand side, the trade deficit should be down as well, but nowhere close enough to offset the drop in supply.

The second element driving the parallel market rate is speculation and dollarisation. The banking system holds between $25 and $30 billion (LE209 billion in July 2016) of individual foreign currency deposits, said Sandeep. In the meantime, nobody knows how much is being hoarded in homes.

“Parallel market rates are quite useful in defining the LE/$ trend, rather than the exchange rate value, due to unrealistic speculation and the high risk premium,” said the Pharos note.

In an attempt to slow down the deterioration in the value of the pound, the head of the Importers Division of the Egyptian Chambers of Commerce, Ahmed Al-Wakil, has called for a two-week end to dollar purchases on the parallel market and a halting of imports of non-essential goods for a three-month period.

However, if not implemented in a studied manner this could cause a shortage in the supply of goods, which would lead to a hike in prices and push inflation higher, according to a note by the Egyptian Centre for Economic Studies, a think tank.

The parallel-market rate was unfazed by news this week that Egypt had reached a currency swap agreement with China valued at $2.7 billion, enabling it to complete the $6 billion needed in bilateral support before the IMF board can meet to review Egypt’s $12 billion loan request.

With a swap with China in place, the Central Bank of Egypt (CBE) could make the issuance of letters of credits and/or lines of credit in yuan available to local businesses, indirectly reducing the pressure on the pound and lowering the demand for dollars, explained Sandeep.

Under the agreement, both counterparties exchange fixed or floating interest payments on the principal amounts, explained the note by Pharos. At swap maturity, the CBE will repay the initial yuan-denominated amount and receive the initial pound lump sum, it added.

Pharos pointed out that the swap cannot be used to repay dollar-denominated debt, and it cannot be used to import goods or services from a country apart from China.

Egyptian imports from China were $5.2 billion in fiscal year 2015/16. “Acquiring a yuan currency swap provides the CBE with an extra tool to stabilise the current high dollar demand, in addition to more foreign exchange liquidity at a reasonable cost,” said Pharos.

The board of the IMF is expected to review Egypt’s request for the loan in a few weeks, meaning that a further devaluation in the value of the pound is close. “A devaluation should be pencilled in for November,” said Pharos.

With the devaluation in effect having already taken place on the parallel market, market players are now calling for it to happen officially sooner rather than later. The lack of action on the part of the government has been causing the market to come to a standstill, said one economist who preferred to remain anonymous. 

“The exchange rate has become prohibitive recently, and the market cannot be expected to accept it, nor can any importer now risk importing at these rates,” Hamdi Al-Naggar, a member of the Importers Division at the Federation of Chambers of Commerce, told Al-Masry Al-Youm.

“The liberalisation of the exchange rate is important,” said IMF communications director Gerry Rice during a regular press conference in Washington last week. “The Egyptian economy is suffering from foreign currency shortages, and that's been reflected in the shortages of some goods,” he added.

For a sustained solution to the ongoing situation Sandeep said that immediate liquidity of $6 to $7 billion should be made available through the banks, sufficing both current and backlog demand. If accompanied by a positive shift in terms of sentiments and business confidence, the dollarisation trend could also reverse.

The above two variables happening side by side would guarantee that new dollars would not go down the drain, he added. With the $6 billion required by the IMF secured, Pharos estimates that the CBE’s international reserves now cover 4.6 months of imports.

Together with the disbursement of the IMF facility’s first tranche of $2.5 billion and the international bond issuance of $2.5 to $3 billion expected in mid-November, the CBE’s foreign currency “ammunition is well above the set floor for a few months until the official exchange rate policy would have gained better ground, leading to weaker speculative attacks,” it said.

Pharos expects the hard currency injections to go “hand in hand with more flexible movements in the exchange rate to ensure the preservation of international reserves.”

At the same time it is expecting a domestic interest rate hike when the CBE’s Monetary Policy Committee meets on 17 November of 200 basis points “to raise local currency appeal, anchor inflation expectations, and attract foreign fund inflows.”

Sandeep sees a lower hike of only 50 basis points at most, however. “The rates are already high. The committee will have the effect on the budget in mind,” he commented. Higher interest rates would mean higher payments on government bills and bonds, further ballooning government debt.

The CBE’s overnight deposit and lending rates now stand at 11.75 per cent and 12.75 per cent, respectively. The CBE has raised key policy rates by a total of 2.5 per cent since the beginning of 2016.

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