July 25, 2016 / 2:01 PM / 4 years ago

Egypt's pound weakens on black market amid devaluation talk

CAIRO, July 25 (Reuters) - The Egyptian pound weakened to an unprecedented 13 to the dollar on the black market on Monday, hit by expectations of a devaluation as an acute hard currency shortage hampers trade in the import-dependent country.

The pound was trading in a wide range of 12.50 to 13.10 to the dollar on the black market on Monday, five dealers told Reuters, at least 42 percent weaker than the central bank’s official rate of 8.78 per dollar.

The traders declined to give trade volumes but said demand had stabilised since the weekend, when two firms were urgently seeking to secure large volumes of dollars amid short supply.

Expectations of a devaluation, which have been floating around since Central Bank Governor Tarek Amer said in early July that maintaining a stable exchange rate had been a mistake, have exacerbated a dollar shortage that had already hit investment.

Last week, Amer ruled out a flotation of the pound for now but said a devaluation “depends on what the bank sees at the appropriate time”. The comments added to the sense in the market that the central bank was preparing a move.

“People don’t want to sell their dollars because they expect a devaluation,” one trader said.

Egypt has faced a shortage in foreign currency since a popular uprising in 2011 and subsequent political unrest drove away tourists and foreign investors.

That put pressure on Egypt’s foreign reserves, which fell from $36 billion that year to around $17.5 billion last month.

The central bank has been rationing dollars and keeping the pound artificially strong through weekly dollar sales, while businesses have taken to the black market to source their needs at a premium.

The central bank devalued the pound by almost 14 percent in March, briefly closing the gap with the black market. But the pound has since weakened to record levels on the black market, increasing pressure on the central bank to devalue again.

“I stopped selling my products yesterday as we wait to find out what will happen with the exchange rate and whether we need to raise our prices,” said one businessman who sources dollars from the black market for his tyre import and sale business.

“Lately the rate has been climbing in a very weird way. A week ago it was 11.5 per dollar.”

Bankers and economists say a devaluation is inevitable but the central bank must attract dollars into the economy to avoid prolonged uncertainty and periodic rate adjustments.

Although the central bank said it would adopt a more flexible exchange rate following the March devaluation, there has been no change in the official rate since then.

“If devaluation is to be effective, the central bank must allow for a more flexible FX regime which would let the currency find its own level rather than simply re-peg at a weaker point,” said Razan Nasser, economist at HSBC Bank Middle East. (Additional reporting by Ola Noureldin; Editing by Lin Noueihed; Editing by Tom Heneghan)

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