Egypt’s black market exchange rate for the US dollar reached a record high of 53 Egyptian pounds amid calls for the cash-strapped North African country to devalue its currency.
The latest rise in the black market price of the US dollar is due to a worsening in recent weeks of an FX crunch that has plagued net-importing Egypt since the start of the Russia-Ukraine war and ensuing exodus of foreign deposits, an unofficial currency trader told The National.
Increased demand for US dollars in late November resulted in a drop of dollars on the market, he said.
“At the end of last month, there was a noticeable rise in demand. Many more people than earlier this year went out searching for US dollars and in large amounts. My read is that everyone is doing this in anticipation of a devaluation by the government which we were all expecting to happen soon after the elections, as a means of preserving the value of their savings,” said the trader, who preferred to remain anonymous due to the illegality of his work.
Egyptian banks, all of which have in recent weeks tightened depositors’ access to US dollars through debit and credit cards, are still operating at the official exchange rate of 30.9 Egyptian pounds per US dollar.
However, analysts have warned that the Egyptian pound is severely overvalued, which has made dollar holders sell on the black market instead.
Government policy has also contributed to the rise in demand for dollars, according to an economic analyst at Cairo University who preferred to remain anonymous.
The government's mounting foreign debt has increased demand for dollars because the associated debt service fees are also paid back in US dollars.
“The more the government borrows, the worse the country’s trade deficit becomes, which in turn increases demand for US dollars needed to service debts, and the rise in demand will continue to push the value of the dollar up against the pound,” he said.
Egypt's is a consumptive economy, meaning most of its industries rely heavily on imports to function. The dollar crunch and related import restrictions have crippled many industries in Egypt and raised prices of basic goods and services to unprecedented highs.
“In a perfect world, the government would make enough dollars available to citizens who need them for imports and sell it to them at the official exchange rate of 31 Egyptian pounds. But what we’re looking at is that the government is simply unable to do this. There aren’t enough dollars available through official channels. The government itself is one of the biggest black market clients for US dollars in Egypt,” the analyst added.
Some of Egypt's top business leaders have called on the government to freely float the currency in order to return trust to the country’s formal markets and remove the expanding black market.
This is also a key demand from the International Monetary Fund, which Egypt has turned to for another round of financing worth $3 billion agreed on at the end of last year.
“The existence of two exchange rates in Egypt is a real crisis. We don’t learn from history. The real problem is the scarcity of the US dollar and we are fooling ourselves if we don’t free the exchange rate,” said oligarch Naguib Sawiris on the sidelines of an economic conference on December 20.
While some Egyptians chose to preserve the value of their savings by purchasing dollars, many more have purchased gold as an alternative. Consequently, bullion rates in Egypt hit their highest ever on Wednesday, when a gram of 21-carat gold was selling for 3,300 Egyptian pounds, rising from 2,800 in late November.
One reason behind the rise is an increase in global gold prices, according to Nagy Farag, a deputy of Egypt’s supply minister in charge of gold industries.
In a televised interview on Friday, he attributed the global increases to the Fed’s fixing of interest rates on December 13 amid reports that rate cuts were expected in 2024.
However, the meteoric rise in Egypt far outweighs global increases, the economic analyst said, explaining that because gold sellers have to import their wares with US dollars, they will therefore increase their prices as the Egyptian pound continues to lose value against the dollar.
“When you have an official exchange rate that is so obviously not reflective of the state of the economy or the value of the Egyptian pound, this invigorates the informal sector, where pricing often comes down to the individual anxiety that a trader might have about changes in the market that could make him lose money or the rising cost of living,” he said.
Egypt's government has devalued its currency three times since March 2022 and its inflation rate has continued to rise steadily since then.
