While it has been hovering around the LE7.25 to LE7.35 level for months, the exchange rate of the US dollar against the Egyptian pound on the unregulated parallel market has witnessed a large increase since early October, with the rise accelerating during the last three weeks to jump to over LE7.67 on Monday. This represents the dollar's highest level in four years and pushes the depreciation in the Egyptian pound since the beginning of the year to five per cent. The pound's official exchange rate is still LE7.14 to the dollar, almost unchanged since May. The relative stability in the dollar rate had been slated as one of the main achievements of the government since last year, as the influx of billions of dollars of Gulf money had fed the country's foreign reserves and helped to make things easier for the pound. The Central Bank of Egypt (CBE) has been keen to tighten its grip on the forex market for fear that letting the pound fall would trigger higher inflation rates at the same time as the government has cut energy subsidies. In December 2012, the bank introduced currency auctions to limit the supply of dollars to the market. “The lack of sustainable foreign currency inflows [from main earners like exports, foreign direct investments (FDI) and tourism] have imposed exchange rate pressures,” said Monette Doss, a senior economist at HC securities. “The reliance on oil imports, in addition to the expected repayment of $2.5 billion of maturing Qatari bonds and $1.5 billion in debt owed to foreign oil companies has added to these pressures.” Another factor that Allen Sandeep, director of research at Naeem Brokerage, said might be contributing to the dollar's rise was the increased demand on dollar for dividend repatriation, as many local companies, with the fiscal year ending in June, are paying out dividends towards the second half of the year. Nevertheless, Ali Al-Hariri, deputy head of the Foreign Exchange Bureaus Division at the Federation of Chambers of Commerce, said that the current increase in the dollar exchange rates was gold-related. With gold reaching unprecedentedly low levels in the international markets, local gold traders are withdrawing dollars from the market in order to buy it. “Gold prices at the moment seem attractive, trading at $1,205 per ounce, which is 22 per cent less than its five-year average,” Doss said. “However, we are still more alarmed by the internal factors.” The Central Bank has closed 15 foreign exchange bureaus for periods of between one and three months in the past two weeks for declining to sell dollars or offering them at higher prices than those agreed with the banks. An employee in a Heliopolis bureau told Al-Ahram Weekly that traders knew how to maneuver around the agreed rates by selling dollars only to established clients. It does not seem that the CBE has much ability to halt the outflow of dollars. “Currently, Egypt's foreign reserves cover 3.4 months of imports. Upon repayment of the Qatari bonds, the months of import coverage will decline to 2.8, which will limit the CBE's capability to support the local currency,” Doss noted. According to CBE figures the reserves in October stood at $16.9 billion. The ability of the CBE to move forward to support the pound will depend a lot on the country's ability to secure more aid and loans to meet its external obligations, plug its energy deficit and improve tourism inflows before the economic summit in the first quarter of 2015. Both the UAE and Saudi Arabia deposited $5 billion in the CBE in October. This complemented what analysts say has been more than $20 billion of Gulf aid since the departure of ousted former president Mohamed Morsi in early July 2013. Jason Tuvey, Middle East economist at Capital Economics, said that the CBE should eventually leave the pound to fall as a necessary condition for Egypt's economy to return to full health. The pound was overvalued by as much as 12 per cent, he said, and a weaker pound would boost the competitiveness of Egypt's exports and encourage a shift in consumption away from more expensive imports, helping to rein in Egypt's large trade deficit, currently standing at a whopping 11 per cent of GDP. Allowing the pound to depreciate and ending restrictions on access to foreign currency would end the system of dual exchange rates, the official one and that available on the black market. “There is still a large premium being paid for dollars on the black market, which suggests that there is plenty of pent-up demand for foreign currency and that this has held back economic activity,” Tuvey wrote in a recent report. “Bringing all of this together, the CBE will need to let the pound fall sooner rather than later. But financial support from the Gulf means that the Central Bank will only let the depreciation be gradual,” he added. Tuvey expected the pound to drop to around LE7.5 against the dollar by the end of 2015 and possibly to LE8 by the end of 2016.
