Market News

BY  Mirette Magdy, Bloomberg News

(Bloomberg) -- Egypt’s pound strengthened dramatically on the local black market for US dollars, a move that may help set the stage for the cash-strapped nation’s widely-anticipated next devaluation.

The currency has been changing hands at less than 60 per greenback since Sunday after hitting records of more than 70 last week, according to traders. The gains followed a far-reaching crackdown by authorities on the parallel market and frenzied, unconfirmed rumors on social media about a vast Gulf investment in the North African nation.

The rate is still significantly weaker than the official one, which has held steady at about 30.9 per dollar for much of the past year, underscoring Egypt’s dire shortage of foreign currency.

The Middle East’s most populous country has devalued its currency three times since early 2022 and another move is widely expected in the first quarter of this year. Authorities are in talks with the International Monetary Fund on a loan boost that may bring in other partners and secure some $10 billion in financing. But a deal likely hinges on Egypt loosening the reins on the pound.

The IMF’s managing director, Kristalina Georgieva, on Feb. 1 said the lender is “very close” to agreeing on a new financial package for Egypt, adding that the talks are a “top priority” for her organization.

Another devaluation runs the risk of fueling inflation that’s only recently started to slow after hitting a record 38% last year. Egyptian billionaire Naguib Sawiris last week stoked controversy by suggesting authorities match the spiraling black market rate.

Trader Arrests

The interior ministry said it has in recent days targeted and arrested those involved in illegally hoarding and trading foreign currencies. A number of traders told Bloomberg they’d paused operations. 

Late last week, rumors circulated on Egyptian WhatsApp groups and social media platform X about UAE investors participating in a multi-billion dollar deal involving a location on Egypt’s Mediterranean coastline. Cairo24, a local news site, later cited “official sources” as saying no agreements had been made with Emirati businessmen at this time.

Read More: Egypt Talks on IMF-Led Deal Go On With $10 Billion on Table

Traders are similarly trimming their bets for a devaluation of the Egyptian pound. In the non-deliverable forwards market, the pound’s 12-month contract has reached below 57 from a high of almost 67 at the end of January.

“The authorities’ preferred strategy is to bring the parallel rate under control before unifying the exchange rate,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. “This means bringing demand for dollars down through tighter policies and increasing supply through external borrowing.”

Soussa estimates Egypt’s total financing needs over the next four years at about $25 billion, assuming a new IMF deal is finalized in the coming weeks and successfully enacted. Sustained inflows of foreign currency will be essential if Egypt is to overcome the crisis in the longer term.

“When the parallel rate is at a more reasonable level, the unification of the currency becomes easier through a devaluation,” he said.

(Updates with IMF comments on talks.)