Contrary to market expectations and forecasts by analysts and experts, the Central Bank of Egypt (CBE) decided to fix the US dollar exchange rate in its regular auction on Tuesday to sell dollars to banks.
The market was abound with expectations over the past few days, with people speculating as to whether the CBE would float the exchange rate completely, or reduce the value of the Egyptian pound against the dollar at a high rate through an exceptional auction.
A number of investment banks’ research centres said that the CBE has to take that step before the Spring meetings with the International Monetary Fund (IMF) and the World Bank begin on 9 October. The future of the initial agreement between Egypt and the IMF is expected to be discussed on the sidelines of these meetings.
The CBE decided on Tuesday to fix the US dollar exchange rate at EGP 8.78, and did not launch an exceptional auction as was expected.
Through that auction, the CBE gave the banks $117.9m. This amount has been directed to cover the imports of pharmaceutical products, medicine ingredients, vaccines, and other chemicals related to medicines.
According to Osama El-Menilawy, assistant general manager of the financial sector at a private bank operating in Egypt, he and many banks’ exchange market officials were, to an extent, expecting the CBE’s decision. This is in contrast to many local and foreign research centres that expected the CBE to reduce the pound’s value at a high rate this week and launch an exceptional auction.
Although such decisions are the secrets of central banks—those relating to exchange rates in particular—and cannot be forecasted, floating the pound completely may be the bitter pill that the CBE will resort to in the end, said El-Menilawy.
It would be incredibly difficult for the CBE to sacrifice part of its foreign exchange at the moment and launch an exceptional auction to sell the dollar to banks, even with the significant increase in reserves as of September, he added.
The CBE announced on Monday that its foreign exchange reserves increased to $19.6bn in September, compared to $16.6bn in August—an increase of roughly $3bn.
Questions have been raised in the market about the reason behind this increase.
Prominent banking sources told Daily News Egypt that the CBE received more than $3bn this month from the World Bank, the United Arab Emirates, and other international institutions the sources did not name.