UPDATE 2-Egypt's pound hits five-week high on black market as businesses cease buying
Newspaper Title: http://www.reuters.com/
Newspaper Number:
Wednesday - 2 November 2016
* Egyptian pound firms 21 percent
* Importers cease buying dollars, say rate speculative
* Businesses urge central bank to seize chance to devalue
* Market talk of banks banning black market forex deposits (Adds details, percentage)
By Eric Knecht and Lin Noueihed
CAIRO, Nov 2 Egypt's pound strengthened 21 percent to its highest level in five weeks on the black market on Wednesday, reversing a rapid slide that had angered importers and prompted them to halt trade.
The Egyptian pound has been falling on the black market since a 2011 uprising scared away tourists and foreign investors, vital sources of hard currency in an economy that relies on imports of everything from food to luxury cars.
But firms say the dramatic slide of the past few weeks left them unable to plan from one day to the next. Many of Egypt's largest businesses decided to stop buying at what they said had become a speculative rate, fearing they could not pass on the cost to beleaguered end-customers.
"When it hit 18.30 I stopped buying ... I said no more, the black market can go to hell," one big businessman told Reuters. "The cost of manufacturing overheads if we stopped working became less than the cost of FX risk."
Their move has transformed sentiment, reversing the depreciation virtually overnight and giving the central bank breathing space to potentially adjust the official value of the pound to a more realistic level.
On Sunday, the dollar was being sold at 18-18.2 pounds and bought at 17.5-17.85 on the black market, more than twice the official rate of 8.8 pounds.
By Wednesday evening, it was being sold at 13-13.5 pounds and bought at 11-11.5, having strengthened 2 pounds in a single day, black market traders said.
"Now everyone is frightened. So the snowball effect has started and people are dumping their dollars so as not to be stuck with them when the price is going down," said Alaa Ezz, secretary-general of the Federation of Egyptian Chambers of Commerce.
"We have done our part as the private sector ... What we are calling for now is that the central bank of Egypt and the government use their instruments within a logical fiscal and monetary policy."
OPPORTUNITY TO DEVALUE?
With the budget deficit at 12 percent in the 2015-16 fiscal year and currency markets facing severe distortions, Egypt reached a preliminary deal with the IMF in August for a $12 billion three-year loan to support an economic reform programme.
As part of those reforms, Egypt is widely expected to devalue the pound and ditch its currency peg to the dollar for a more flexible exchange rate mechanism, a move economists say would rebalance markets and unlock billions of dollars in foreign investment.
Businessmen said the black market had been propelled by a sense that authorities were holding back for fear of stoking inflation in a country where tens of millions rely on state-subsidised food. They called on the central bank to seize the opportunity to devalue while the market was in its favour.
"If the government does not interfere very soon, the rate will just rise up again," said one commodity trader, who bought dollars on Wednesday at 13.85.
Businesspeople and black market traders said the pound had also rallied on talk that Egyptian banks would stop accepting deposits of foreign currency without documentation showing it was sourced legitimately.
Several banks told Reuters they had not received any formal instructions from the central bank on such a rule.
Sources at Commercial International Bank said an internal memo had been issued reminding branches to ensure full compliance with existing central bank regulations issued in March concerning dollar transfers.
There was no immediate comment from the central bank.
"The weakness in the black market was built on speculation and we think the rate should settle around 11 to 12," said head of research at Naeem Brokerage Allen Sandeep. (Additional reporting by Arwa Gaballa and Ahmed Aboulenein; Writing by Eric Knecht and Lin Noueihed; Editing by Gareth Jones and Alison Williams)
