Last month two Egyptian banks refused to give Ahmed El-Rifai the dollars he needed. His company, Egyweb, sells ads locally for Facebook (FB), and he had to pay the U.S. company its share of the revenue in greenbacks. Frustrated, El-Rifai turned to a more reliable source: the black market, which sold him dollars at an 8 percent markup to the official exchange rate of 6.7 pounds to the dollar.
The emergence of an unregulated currency market shows that Egyptians’ faith in the country’s pound is weakening. The biggest slide in foreign exchange reserves in at least 15 years has prompted the Central Bank of Egypt to curb access to dollars, which the government needs to service external debt, finance imports of food, and buy oil. The pound has dropped 5.6 percent so far in 2013, making it one of the world’s 10 worst-performing currencies, along with the Venezuelan bolívar and the Malawian kwacha. Traders expect it to weaken another 6 percent in the next three months.
Two years after the ouster of President Hosni Mubarak, an escalation in violence between opponents of Islamist President Mohamed Mursi and police has dashed hopes of an economic recovery. The upheaval has delayed talks with the International Monetary Fund for a $4.8 billion loan that analysts at Bank of America Merrill Lynch (BAC) say is crucial to stabilize the currency. Reserves of international currency, $36 billion in 2010, have tumbled to $13.6 billion, the lowest level since at least 1997, according to the central bank.
“I know that the central bank is taking steps to reduce the black and gray markets for foreign exchange,” U.S. Ambassador Anne Patterson said in a speech in Alexandria on Feb. 10. Still, the “longer Egypt restricts access to foreign exchange, the more it will undercut investment interest in the country.”
The plunge in reserves is due to many factors: capital flight, a 19 percent drop in tourism revenue, a collapse in foreign direct investment, and the rising cost of paying for imports. A weaker currency has pushed up import prices and the overall annual inflation rate to 6.3 percent—the highest level in more than two years, according to government data released on Feb. 10.
As a result, Hisham Ramez, who became the central bank governor on Feb. 3, may raise interest rates this year by as many as 2 percentage points, to 11.25 percent. That would be the highest benchmark rate since 2009 and could put a damper on growth, forecasts Mohamed Abu Basha, an economist at EFG-Hermes. Growth will average 3.3 percent in fiscal 2013 and 2014, “well below” the pace necessary to accommodate the 700,000 Egyptians joining the labor market every year, says Fitch Ratings, which downgraded Egypt on Jan. 30. Growth averaged 5.3 percent between 2005 and 2011. Standard & Poor’s (MHP) cut Egypt’s credit rating in December, putting it six steps below investment grade and on par with Greece. In the bond market, the average yield on five-year local-currency bonds jumped 61 basis points at the last sale on Feb. 4, to 14.79 percent, central bank data show. A rising yield means investors are shunning the bonds. Central bank officials weren’t available for comment.
A 60 percent drop in international currency reserves since the 2011 revolt prompted the central bank to start dollar auctions on Dec. 30, capping the amount each lender can buy. Less than 33 percent of the bids have been accepted, a sign of the high demand for dollars.
The day after Ramez took office, the central bank tightened the spread at which banks can trade dollars with each other to keep the pound from depreciating more. With the same goal in mind, the regulator also instructed banks to offer a less attractive dollar-pound exchange rate to business customers. The central bank’s policies have even nudged the exchange-rate premium on the black market down slightly, says a black market dealer whose other business is tailoring. He asked not to be identified because trading currencies outside of banks is outlawed. On Feb. 22, he quoted a rate of 7.1 pounds for one dollar, down from 7.2 pounds in mid-January. Yet the central bank’s moves haven’t slowed the flow of customers seeking dollars in his Cairo shop, where he exchanges about $100,000 a day, he says.
Others, such as Motaz Mohamed, who works for a limousine service in Cairo, are trading currencies to boost their income. Mohamed, whose monthly salary hasn’t exceeded $300 after a 16-year career, says he buys dollars from tourists who need pounds and sells them to dealers, including the Cairo tailor.
The crisis has made Egyweb owner El-Rifai “abandon optimism and just focus on reality,” he says. “People are optimistic about Hisham Ramez, but it’s now more than just managing reserves or the exchange rate; the country is in a real crisis,” he says. “One man can’t perform miracles.”