March 14, 2016 / 9:28 AM / 4 years ago

Egypt's central bank devalues pound to 8.85 per dollar, injects $200 mln

CAIRO, March 14 (Reuters) - Egypt’s central bank devalued the pound currency on Monday to 8.85 pounds per dollar from 7.73, aiming to eliminate a black market for dollars that has flourished as a foreign exchange shortage stifles business activity.

The central bank had said it would sell $200 million in a special auction with bids to be submitted between 8.30 a.m. and 9 a.m. (0630-0700 GMT), the latest attempt to pump foreign exchange into an economy starved of dollars.

Central bank data showed it sold $198.1 million at a cut off price of 8.85 Egyptian pounds.

The pound had been under intense downward pressure in recent weeks and had weakened to almost 10 to the dollar on the black market.

A black market for dollars has sucked up liquidity from the banking system and the central bank had imposed restrictions on currency transfers but raised them last week after the currency crisis worsened and goods were piling up at ports. Egypt depends heavily on imports.

The new rate means banks can sell dollars to customers at 8.95 pounds per dollar and buy at 8.9 pounds, one banker said.

That compares to around 9 pounds per dollar that the black market sold at on Sunday evening and 8.84 pounds that the black market bought at, two black market traders said.

“With this move today they hurt the black market. They hit the black market,” one black market trader told Reuters.

The central bank had resisted devaluation and the gap between the official and black market rate was creating imbalances in the market. Businesses who saw a devaluation as inevitable were holding back on investment.

Economists welcomed the move which they said would help buoy the markets and encourage foreign investment in Egyptian stock markets and treasuries.

“This is great news. You’ve made my day,” said Hany Genena, head of equity research at Beltone Financial.

Last week, the central bank held another exceptional auction, offering $500 million to help businesses obtain the foreign exchange they needed to clear imports of strategic goods which had been delayed due to the forex shortage.

The additional liquidity helped ease the gap between the official and black market rate to about 9.25-9.30 pounds per dollar on Sunday, according to three black market traders.

At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade.

The central bank imposed strict controls on hard currency movements in February 2015 to preserve scarce forex for imports of essential goods. The restrictions were unpopular with businesses which had seen their business hit.

Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February. (Reporting by Asma Alsharif and Eric Knecht; Witing by Asma Alsharif; Editing by Catherine Evans)

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