Although the Central Bank of Egypt (CBE) has taken a variety of measures to bolster the Egyptian pound against the US dollar and to combat the black market, the illegal trade continues to flourish. The Egyptian exchange market witnessed a slight rise in the US dollar on the black market earlier this week, which was trading for 7.30/35 to the pound, give or take a few piastres in price from one outlet to another. At the banks, it was trading at LE6.96 for buying, compared to LE6.99 for selling, earlier this week. Experts said that the activity in the black market for the dollar would stop only when the dollar became more available again and there was a supply of foreign exchange bigger than the demand for it. “It is the old theory of supply and demand,” said Mohamed Al-Abyad, head of the forex division at a local bank. “The demand for the dollar is much higher than the supply in the market, which leads to the rise in price compared to official prices at the banks.” The Central Bank's forex auctions supply the demands of the banks, but the banks cannot supply all their clients' demands, Al-Abyad added. The banks are required to trade dollars around the Central Bank's auction prices for interbank, commercial and retail transactions, which gives the Central Bank significant influence over official exchange rates. Banking sources confirmed that the banks are committed to securing dollars according to the priorities set by the Central Bank, which pushes some customers to seek dollars from the black market at higher prices. In reality, many businesses and individuals cannot obtain the dollars they need from commercial banks. Instead, they turn to the black market, which is setting the exchange rate at around LE7.35 to the dollar. Legal proceedings have been taken against some bureaux de change, with 13 being closed down last month, but the move has not significantly impacted the black market. “According to CBE regulations, banks supply clients' demands only to cover imports of strategic commodities, and other than that individuals and companies resort to the black market to cover their needs for foreign currency,” Moheb Malak, analyst at Prime Holdings, explained. The CBE has made a decision to give priority for foreign currency to imports of basic food commodities, grains, machinery, production equipment, automobile parts, intermediate goods, production inputs, raw materials and petroleum products and their derivatives, in addition to drugs, vaccines, animal feed, fertilisers, pesticides, industrial oils and greases. The decision has been extended until June 2014. The pound has been under pressure during the last three years of political turmoil, and Egypt's foreign currency reserves currently stand at around $17.1 billion. “Egypt's situation is secure for now, and the reserves figures are just fine under the circumstances of the Egyptian economy,” CBE governor Hisham Ramez said in an interview with the online news site Zawya this week. He added that the figure was likely to increase during the current year, with the expected improvement in economic indicators and political stability contributing to the return of tourism and foreign investment. The Central Bank introduced forex auctions over a year ago. In January, it held a $1.5 billion auction, its largest ever, to replenish the market with dollars and curb unofficial currency trading. Some experts believe that eradicating the black market will only take place if the Central Bank is able to increase the amount of foreign exchange it supplies. After a large dollar auction in September, the gap between the official and black market dollar exchange rates narrowed to just five or 10 piastres. But in the following months the gap sprinted back to around 40 piastres, an indication that there was a significant disparity between supply and demand. With pledged Gulf aid registered at $12 billion last year, Saudi Arabia recently also announced that it would give Egypt up to $4 billion in additional aid in the form of Central Bank deposits and petroleum products. However, even with more billions expected in the near future, the Central Bank remains unable to deluge the market with as many dollars as is needed to weaken the black market. Since last September, Egypt has also returned a total of $3 billion in Qatari deposits to the latter country. Egypt was scheduled to pay the Paris Club of creditor countries an instalment of around $700 million in January, the first half of a total of $1.4 billion debt repayments due this year. “The deficit, it seems, is bigger than the aid and the auctions,” Malak said. “Slow tourism revenues and lack of FDI are keeping supplies short.” When people feel they are approaching hard times they start to pile up dollars, Malak said. “They start to accumulate a stock of dollars when they feel they will face shortages and consequently prices increase and the market fluctuates.” But he added that recovery was probable. “People are looking forward to economic recovery and the return of political stability, tourism and FDIs,” he noted. However, last week the international credit-rating agency Fitch Ratings said that Egypt's economy would take over two years to recover from the upheavals following its January 2011 Revolution. “We expect economic performance to improve over our two-year forecast period, but by end 2015 the economy will still be much weaker than in 2010, illustrating the damage to Egypt's credit profile caused by political and economic turmoil,” Fitch said in its report. The rating agency also said that although Egypt's ratings had stabilised on “tentative political and economic improvements”, “rapid upgrades are unlikely”.
