Egypt pound weakens as banks suck up black market dollars

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Egypt's pound weakened on Tuesday as dollar-starved banks bought hard currency from the black market to meet demand from importers and other companies after Egypt ditched its currency peg last week.

The pound was quoted at 17.60-17.90 against the dollar in the interbank market at 3:26 p.m. (1326 GMT), after trading at an average of 16.83 on Monday, but volumes were tiny as a severe dollar shortage stifled liquidity.

But bankers said volumes were beginning to improve as banks sourced more dollars from the black market, sucking foreign exchange back into the formal banking system.

"The volumes of dollar inflows to the banks are increasing, relatively speaking, compared to when there was central bank interference," said one banker.

"The number of transactions we are executing with clients is increasing daily. All these are good signs, regardless of the weakening pound. This is the only way to attract dollars back into the banking system."

The central bank abandoned the pound's peg of 8.8 to the dollar on Thursday, floating the currency in an effort to attract inflows of capital and crush a booming black market in dollars.

Import-dependent Egypt has struggled to attract dollars and revive the economy since the 2011 uprising that ended Hosni Mubarak's 30-year rule drove away tourists and foreign investors, essential sources of hard currency.

As maintaining the currency peg drained its foreign reserves, Egypt imposed capital controls and rationed dollars, forcing importers to turn to the black market for their needs.

Meanwhile, ordinary Egyptians kept dollars stashed under mattresses as a hedge against inflation that has soared above 14 percent. This starved the banking system of hard currency.

Since the pound was floated, banks have been opening daily until 9 p.m. to accept dollar deposits and sales. The government has run messages on Egyptian radio calling on the public to shun the black market and use the banks.

It is not clear how many dollars have come into banks since the float, but bankers and businesspeople said some black market dealers had been forced to sell dollars into the banking system as they struggled to find buyers.

"I don't think people will jump right back to the black market because the banks are trying to get the liquidity form the black market as well," one commodities trader said on Tuesday.

A banker said black market dealers were offering dollars to banks for 18 pounds on Tuesday. Some of those dealers had originally bought dollars at or near those levels, and they were looking for opportunities to exit their positions without losing money.

Another commodities trader said he had been forced to go to the black market because his bank was not able to supply him with all the dollars he had requested.

"I would prefer the bank. If I can get it from the bank, I will," he said.