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Egypt pound float appears to be managed

CAIRO Egypt's recent pound flotation may be more "managed" than free, with a lack of full dollar convertibility, static official exchange rates and a widening gap to black market rates, analysts say.

After a widely hailed decision to liberalise the pound late last month, economists and analysts say the government appears reluctant to truly relinquish control of the currency market, much to the detriment of the pound and faith in the economy.

"There has been a step in the right direction in the sense that there has been a declaration of a floating exchange rate and the Egyptian pound really floated for a day or two, or perhaps a week," ING economist Caren Gaboutchian told Reuters.

"But (now) we see no evidence of this happening and if it doesn't get sorted in the short term, then sentiment will get even worse," he said, adding regional tensions were probably also increasing speculative pressures against the pound.

The latest average spot rate was £5.5159 to the dollar, versus 5.5184 on Monday. At these rates, the float has so far effectively devalued the pound by about 16 per cent from a previous weakest permitted rate of £4.6453 to the dollar.

Market sources said that amid acute dollar shortages, the black market was trading at £6.17/6.20 per dollar compared to 5.75/5.80 a week ago.

Analysts attribute the resurgance of the black market to the dollar shortage and little sign that rates at banks and exchange bureaux are fluctuating with supply and demand. They say proof of a genuine free float will be needed to boost Egypt's investment and market reform credentials.

Five big Egyptian banks surveyed by Reuters were selling even small amounts of dollars only to top import-export clients or people with valid travel documents. "Investors hoped to see a free market, new money coming in, money coming out, dollars, pounds, euros etc, just a free market. That is what everyone is after," Gaboutchian said.

Analysts say the exchange rate needs to float to an equilibrium rate where demand backlogs are cleared. Three analysts' estimates of where the pound-dollar rate would find equilibrium varied from 5.0 to 6.0. But analysts say newly floated currencies tend to "overshoot" before correcting. "It is hardly a market clearing rate if people are struggling to get their hands on foreign exchange, so it would suggest that, in some respects, it is still being managed," said Tim Ash, economist at Bear Stearns in London.

A recent HSBC research report also called the new currency system a "managed float", as some informal exchange controls remained, and said "there also appeared to be a tacit agreement among banks not to sell dollars to possible speculators".

Some Cairo bankers also said the float appeared to be managed by the authorities, especially as exchange rates were more static since mid-February around 5.50/5.51, after slipping steadily since the pound was floated on January 29.

One private-sector banker said the central bank was influencing rates indirectly through bankers' associations and possibly also state banks, who dominate the market. "An agreement between banks was also made to limit bid/offer spreads to three piastres (£0.03)," he added. Other bankers also said there was an informal agreement to limit spreads. Central bank officials could not be reached for comment.

But despite its concerns, HSBC hailed the bold float move as crucial to kickstarting economic growth at a time when inflationary pressures were limited. Other analysts said they hoped to see less management of the currency once the new system became more established in a few weeks' time. "The central bank could intervene in the short term, just to give some sort of guidance...and provide some foreign exchange, but just in the short term, for one or two weeks maximum, then everything should be left to supply and demand," Gaboutchian said, adding officials should stress the role of market forces.

Some economists say the central bank should tap its reserves to provide liquidity, at least to restore some initial confidence in the system. The central bank has yet to intervene aggressively to assure liquidity in the system or to guarantee rates. It has announced it would cover banks' short positions up to January 16, and some banks have reported receiving dollars under such conditions.