Egypt strengthens exchange rate against dollar, defying expectations of devaluation

CAIRO – Egypt strengthened the official exchange rate by 0.20 pounds against the dollar on Wednesday, defying expectations of further weakening as the country grapples with the aftermath of last month’s Russian plane crash.

Figures posted Wednesday on the websites of banks, including the National Bank of Egypt, show an exchange rate of 7.83 pounds to the dollar, down from 8.03.

Egypt’s state-run news agency cited bankers as saying that the value was set after the central bank “injected large amounts of dollars in the banks today.”

The move came as a surprise to investors, who see the pound as overvalued and had been expecting it to be further depreciated.

“I don’t think it’s going to resolve investors’ concerns about devaluation risk in the medium term,” said Hany Farahat, a senior economist at CI Capital in Egypt.

“If the new price prevails, it will add to un-clarity and confusion about monetary management, and I don’t think it’s positive at all” for foreign investors, who have been expecting more devaluation, he said.

Foreign currency reserves dropped 20 per cent from April to October, according to central bank data.

The central bank’s move followed an announcement by two of Egypt’s largest banks, which are state-owned, of new Egyptian pounds saving certificates with a return of 12.5 per cent. Analysts said both moves appeared aimed at encouraging black market dealers to unload into the market dollars they are hoarding.

“This is a set of policies that apparently aims at providing artificial support to the Egyptian pound,” said Farahat. “However it doesn’t change the long term pressures on the local currency.”

Egypt has been struggling to maintain its foreign reserves since the 2011 uprising that toppled longtime autocrat Hosni Mubarak, which was followed by years of unrest.

Many Egyptian businesses rely on imports, and recently have been struggling to find dollars.

Hany Genena, head of research at Pharos Securities Brokerage, suspects that in addition to fighting the black market, the central bank may be creating artificial currency volatility to prepare the market and industries that deal with foreign currency for some kind of float.

“Before the end of the year we have go back and start to depreciate,” Genena said. He suspects the bank might try to free-float the currency in the first half of next year, in part to improve Egypt’s chances of obtaining a loan from the International Monetary Fund, which has been advocating the move.

Egypt’s economic outlook grew even bleaker following the Oct. 31 crash of a Russian passenger plane in the restive Sinai Peninsula, which killed all 224 people on board and led Britain and Russia to suspend flights over concerns the plane may have been downed by a bomb.

Britain suspended flights to the main Sinai resort town of Sharm el-Sheikh, where the flight had originated, a week ago. Two days later, Russia went a step further, suspending all flights to Egypt. Moscow said the ban was necessary because of concerns about security at Egypt’s airports. On Tuesday, Sergei Ivanov, the Kremlin chief of staff, said the ban was expected to last for at least several months.

Tourism, one of Egypt’s main sources of foreign income, was slowly recovering before the crash, mainly in Red Sea resorts. Sharm el-Sheikh is a top tourist destination in the country, and is particularly popular among Russians, who comprised about a third of all tourists visiting Egypt in 2014.

Egypt’s benchmark stock index plunged 4.4 per cent on Tuesday and another 0.3 per cent on Wednesday.