Egyptian banks are wading into uncharted territory as they start trading currency without central bank restrictions for the first time after policy makers decided to float the pound to attract investments and ease the nation's dollar crunch.
Local lenders will be able to trade foreign exchange on the interbank market between 10 a.m. and 1 p.m. local time on Sunday. Bankers huddled on Friday to lay out guidelines that would regulate trading and will 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 $ 12 billion loan from the International Monetary Fund, an accord that officials say will help restore investor confidence in an economy battered by years of turmoil. The central bank said on Thursday it expects short-term volatility in the exchange rate. The pound tumbled 45 percent against the 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, the Cairo-based senior economist at CI Capital.
Egypt's central bank had maintained a tight grip on the official exchange rate after the 2011 uprising that toppled President Hosni Mubarak. Officials now say the won't use the country's foreign reserves to defend the 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 the highest level in more than a decade and allowed lenders to operate on weekends to attract dollars.
National Bank of Egypt and Banque Misr — Egypt's two biggest commercial banks — bought a total of $ 35 million on Thursday and Friday, their chairmen told Bloomberg News on Saturday. Central bank Governor Tarek Amer said banks bought eight times more dollars on Thursday than in the "previous period," without providing more details.
CI Capital's Farahat said it will take time for investors to trust the new system. Meanwhile, the expected volatility in the exchange rate will make it attractive for dollar holders inside Egypt.
"The price of the 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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