Egyptian banks are wading into uncharted territory as they start trading currency without central bank restrictions for the first time, after policymakers decided to float the Egyptian pound to attract investments and ease the nation’s dollar crunch.
Local lenders were yesterday able to trade foreign exchange on the interbank market between 10am and 1pm.
Bankers on Friday huddled to lay out guidelines that would regulate trading and would share the suggestions and recommendations with the central bank, according to four people who either attended the meeting or were briefed on the discussion. They spoke on condition of anonymity.
The decision to abandon currency controls comes as Egypt seeks to secure a US$12 billion loan from the IMF, an accord that officials say would help restore investor confidence in an economy battered by years of turmoil.
The central bank on Thursday last week said it expects short-term volatility in the exchange rate.
The Egyptian pound tumbled 45 percent against the US dollar, before paring losses during the weekend.
“The market is currently undergoing a phase of price discovery and it is positive that the central bank said it would not to intervene during that initial phase,” said Hany Farahat, a Cairo-based senior economist at CI Capital.
The Egyptian central bank had maintained a tight grip on the official exchange rate after the 2011 uprising that toppled former Egyptian president Hosni Mubarak.
Officials now say they would not use the country’s foreign reserves to defend the Egyptian pound.
The new system aims at ending a black market that has flourished over the past year.
The central bank raised interest rates by 300 basis points to its highest level in more than a decade and allowed lenders to operate on weekends to attract US dollars.
The National Bank of Egypt and Banque Misr — Egypt’s two biggest commercial banks — bought a total of US$35 million on Thursday and Friday last week, their chairmen told Bloomberg News on Saturday.
Egyptian central bank Governor Tarek Amer said banks bought eight times more US dollars on Thursday last week than in the “previous period,” without providing more details.
Farahat said it would take time for investors to trust the new system.
Meanwhile, the expected volatility in the exchange rate would make it attractive for US dollar holders inside Egypt.
“The price of the [Egyptian] pound must first stabilize in the interbank market before we see major portfolio inflows,” Farahat said. “It will happen gradually over the coming months, not overnight.”
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