In a bid to help corporations pay off foreign currency obligations, the Central Bank of Egypt launched a $1.5bn auction on 16 March, which has impacted the profitability of local banks.
The central bank sold $1.5bn in an exceptional auction at a rate of LE8.78, according to state news Agency MENA.
Despite the Egyptian pound being weakened to 8.85 to the dollar on 14 March, the auction was set at a higher rate in a move to improve sentiment, according to local analysts.
The move by the central bank was aimed at helping corporations pay off foreign currency overdrafts, which were set up amid a shortage of dollars.
Overdraft facilities were set up for corporations at a rate of approximately 4-5 per cent to help them pay off foreign currency obligations. The opening of the auction has meant corporations have been able to pay these off with the local banks having to accept short-term placements to the central bank at one-year US dollar libor rates, currently sitting at 1.23 per cent.
The auction was seen as a perception-driven move by local analysts. A local banker told MEED the auction was open with a condition that the same amount of repayed dollars must be tied up with the central bank.
The move has impacted our profitability as we lose out on overdraft facilities at a much higher rate than local libor rates. It has also impacted our liquidity as whatever dollars we were able to receive in overdraft repayments had to be matched in short-term placements to the central bank, says a local analyst.
The conditions applied by the central bank means the auction will not affect the central banks foreign reserves, which are currently floating around the $16bn mark.
Despite this, the move will be welcomed by local corporations who are dependent on a the supply of dollars in order to pay suppliers and meet financial requirements.
Egypt has been struggling with a currency crisis rooted in the shortage of dollars available in the country. The Egyptian pound has been deemed overvalued for some time, which has prompted the central bank to undertake a number of devaluation steps in recent months.
On 14 March the central bank devalued the currency by approximately 14 per cent in order to bring it closer to a fairer valuation. Analysts have suggested a more balanced rate is closer to EG10, where it is currently trading on the black market.
The devaluation of the currency is needed in order to improve Egypts competiveness and attract more foreign direct investments. Although Egypt remains a net importer in most sectors, the government is hoping that devaluing the currency can stimulate growth through increased capital inflows coupled with more competitive exports.
The central bank has promised further devaluation during 2016, with local analysts hoping for for a rate of 9.50 by year end.