Egyptians turn to black market for hard currency

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A run on Egypt’s pound has left foreign currency in short supply and driven some dealers into the streets in search of people with U.S. dollars to sell, spawning a new black market.

The currency’s decline was triggered by a political uprising that swept Hosni Mubarak from power in 2011 and it has officially lost 8 percent of its value since Dec. 30.

Black market rates are even weaker, a sign that although the central bank managed to stem the slide in official trade last week, Egyptians are nervous about holding on to pounds.

Some dealers tout discreetly outside regulated foreign exchange bureaux and banks in Cairo, illegally offering a better rate to those looking to sell hard currency.

“There are no dollars. Everyone that walks in asks for dollars but supply is scarce,” said one of the dealers.

The central bank took steps last week to manage the rate including narrowing the pound's trading band. It was last bid at 6.71 to the dollar on Sunday in interbank trade.

That is 13.4 percent weaker than its level on the eve of the uprising that led to Mubarak’s downfall, pitching Egypt into two years of turmoil that has scared off tourists and investors.

On Cairo’s streets, one dealer offered to sell dollars at a rate of 6.95 on Thursday - 3.5 percent weaker than the official price. Another asked for 6.89 pounds to the dollar.

The pound’s decline has been reflected in a drop in Egypt’s foreign reserves, which fell to $13.6 billion at the end of January - below the $15 billion level needed to cover three months' imports. The reserves stood at $36 billion on the eve of the uprising against Mubarak.

Complicating a business climate already weighed down by political unrest, some importers say they are having to source their foreign exchange needs from what they call the parallel or open market.

One senior executive at an Egyptian company that imports goods from abroad said companies were able to source their dollar needs from the black market, but forecast that supply would tighten further in the coming weeks.

“Corporates are not having problems arranging for U.S. dollars from the open market. However, there is a spread that ranges between 16 to 20 piasters between the bank rates and the open market,” he said.

Speaking on condition of anonymity because he was discussing an illegal market, he forecast that dollar supply would dry up further because of factors such as political uncertainty.

“What will happen? Most probably you will start seeing products disappearing from supermarket shelves,” he said. “The challenges that we are facing now are nothing compared to what we could be heading to.”

Central bank governor Hisham Ramez has said he is not worried about the emergence of a black market.

Bonook El Youm, a weekly supplement published by the financial daily Al-Alam Al-Youm, quoted him as saying he is confident the authorities have the tools to eliminate it completely.

There is no sign of dealers being targeted by the police.

Officials at the central bank did not respond to calls or emails from Reuters requesting comment on the subject.

Bankers seeking to meet their clients' foreign currency needs through official channels face a wait of weeks or months, said one who deals with major corporate clients.

“I used to order it and get it on the next day or the following one at most,” said the banker, speaking on condition of anonymity because he was not permitted to talk to the media.

The decline in foreign reserves drove the central bank to introduce the system of regular U.S. dollar auctions in late December to avoid a full blown currency crisis.

The weighted average bid at those auctions has been setting the official exchange rate in banks and foreign currency bureaux. Banks had been allowed to buy or sell dollars or their equivalent to other banks in a band of 0.5 percent above or below the average bid at the auction.

Last Monday, the central bank narrowed the band, setting a limit of 0.01 pounds above or below the weighted average bid.

Dealers say the currency has recovered somewhat since hitting a black market low of around 7.5 pounds to the dollar in late January, when deadly street violence flared during protests marking the second anniversary of the anti-Mubarak revolt.

But some forecast that the pound could come under further pressure with political instability pushing back the prospects of Egypt concluding a deal with the International Monetary Fund seen as vital to securing a $4.8 billion loan.

“The current FX management framework could continue to play for time, though (the Egyptian pound) will remain vulnerable in the meantime,” Bank of America Merril Lynch said in a report last week.

“Domestic U.S. dollar demand is likely to strengthen and the gap between the official and parallel rates is likely to widen.”

Simon Kitchen, strategist for investment bank EFG-Hermes, added: “It’s difficult to see a long term equilibrium in the FX market until the political situation improves and we at least see a deal with the IMF.”

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