Excerpts of WSJ article

By NIKHIL LOHADE in Dubai and DAHLIA KHOLAIF in Cairo

Aug. 29, 2016 5:22 p.m. ET
In a working-class suburb of the Egyptian capital, Kamal sells suitcases and handbags
out of a small shop. He also delivers U.S. dollars stashed in plastic bags once a rate is
agreed to over the phone.
The 45-year-old dealer is part of a black market that is flourishing in the North
African country as traditional sources of hard currencyinvestment and tourism
dry up. Despite attempts by authorities to clamp down, Egypts black market provides
a critical spigot for dollars and euros to buy such essentials as medicines and wheat.
As the government rations its cash, small and big businesses in Egypt have turned to
the black market to fulfill their foreign-currency needs.
Kamel Galal, the head of investor relations at Ezz Steel Co., said the
countrys biggest steelmaker by output must obtain much of its
foreign currency through what he calls the parallel market.
It has been quite a heavy burden when it comes to actual
payments, he said.

Egypt, a linchpin for the regions political stability and economic growth, has been
struggling. Foreign investment is below levels reached during the second half of the
last decade, according to Moodys. Meanwhile, tourism has dropped sharply since the
2011 Arab Spring uprising because of political uncertainty. Terrorist attacks in recent
months have further dented sentiment.
Since the Arab Spring, foreign-exchange reserves are down by half to about $15.5
billion at the end of July. This month, Cairo turned to the International Monetary Fund
for a $12 billion loan over three years. Egypt is in discussions with other agencies,
including the World Bank and African Development Bank, for more funding to help
plug a funding gap that authorities estimate at $21 billion over the coming three years.
Also this month, a United Arab Emirates aid agency, the Abu Dhabi Fund for
Development, said it deposited $1 billion in Egypts central bank to shore up the
countrys finances and currency.
Egypts economy is expected to expand at about 4% this year, according to the World
Bank, not fast enough for a country where inflation hit 14% last month and the rate of
unemployment is in double-digit percentages, according to the countrys statistical
bureau. An IMF report in April predicted inflation this year would fall to 9.6%,
compared with 11% last year.
The bureau said Monday that the number of tourists in July was 42% lower than the
year-earlier period. According to official statistics, the number of tourists has dropped

by nearly 50% since a Russian jetliner was downed by a terrorist bomb in October,
killing all 224 on board.
The expected emergency cash infusions have barely slowed the Egyptian pounds
decline against the dollar.
Some dealers last week were offering to buy the dollar for about 12.3 pounds each,
nearly a 40% premium over the official rate of 8.88 that the central bank has held
steady since devaluing the currency in March. At the same time, dealers were selling
the dollar for roughly 12.7 pounds each.
The pound has continued to depreciate largely because many economists and ordinary
Egyptians remain skeptical the government can hit its financial targets and implement
tough overhauls.

President Abdel Fattah Al Sisi, who has cracked down on political opponents and
sought to fend off a spate of terror attacks, recently acknowledged the difficulty
implementing overhauls to turn around the economy.
The size of the challenge is beyond imagination, and the responsibility of tackling it
does not fall on my shoulders alone, but is the responsibility of all Egyptians, Mr.
Sisi said in an interview to state-run newspapers this month. The future of the nation
is at stake.
In recent months, Egyptian authorities have shut dozens of foreign-exchange bureaus
to ease the pressure on its currency. The government also has approved jail terms and
higher fines for breaking foreign-exchange regulations. Still, currency dealers who
have been forced underground offer a substantial premium on the dollar.
Its more like drug trafficking, said Kamal, the suitcase salesman. There is a lot of
risk, but also good money.
The government is aiming to raise a total of $21 billion over the next three years, but
analysts at Fitch Ratings said this month that Egypts total financing needs could be
closer to $10 billion annually.
And it needs to introduce measures that Egypts largely poor and middle class of 90
million people are expected to resist.

When it reached a preliminary loan deal with the IMF, Egypt also agreed to cut
government debt, introduce a value-added tax, reduce energy subsidies and move to a
flexible exchange rate.
We believe these measures will significantly raise the political costs of reform, said
Karachi-based Bilal Khan, a senior economist for the Middle East, North Africa and
Pakistan at Standard Chartered Bank . As such, we expect Egypts socioeconomic
situation to worsen before it gets better.
Among the risks of a weaker currency, subsidy cuts and tax overhauls are higher
inflation and the possibility of interest-rate increases, which would increase Egypts
borrowing costs and further weigh on Egyptians already struggling to cope with a
sluggish economy.
See video
https://www.youtube.com/watch?v=fkY-mnNpUCQ
Data References

http://www.tradingeconomics.com/egypt/inflation-cpi

http://www.tradingeconomics.com/egypt/gdp-growth-annual

http://www.tradingeconomics.com/egypt/manufacturing-production

News updates
Egyptian prime minister pledges to end currency crisis
Egyptian Prime Minister Sherif Ismail told parliament on Monday the
government was working with the central bank to bring an end to the
discrepancy between the official and parallel market exchange rates for the
Egyptian pound.
Ismail said that a previous currency adjustment, a reference to a 14 percent
devaluation in March, had happened "without proper instruments" and brought
about negative effects.
The Egyptian pound has been falling on the black market since the 2011
revolution drove away tourists and foreign investors, vital sources of hard
currency in an economy that relies on imports of everything from food to
luxury cars.
The central bank has been rationing dollars and imposing capital controls as it
maintains an artificially strong pound at 8.8 per dollar but traders said on
Monday the rate was 18-18.2 on the parallel market compared to 16.1 pounds
last week.

"We appreciate the country's situation. We are going through a very tough
situation," Ismail told members of parliament.
The pound has been tumbling almost daily on the black market since Saudi
Arabia halted petroleum aid to Egypt this month, forcing it to spend $500
million for oil products on the spot market.
Egypt is waiting for IMF board approval of the three-year program. In return, Egypt
must carry out economic reforms, including a devaluation of the pound and painful
subsidy cuts.
The central bank devalued the pound by almost 14 percent in March, briefly closing
the gap with the black market. The renewed weakening has increased pressure on the
central bank to devalue again.
The country has been trying to rebuild its reserves, which are currently around $19.5
billion, far lower than the $36 billion in 2011.

Egypts bank to offer IPO to end currency crisis

http://english.alarabiya.net/en/business/economy/2016/11/
01/Egypt-s-bank-to-offer-IPO-after-PM-pledges-to-endcrisis.html

Staff writer, Al Arabiya EnglishTuesday, 1 November 2016

Egypt will sell $120 million on Tuesday in its regular weekly dollar
auction, central bank data showed after the countrys premier
pledged to end currency crisis the day before.
Speculation has been mounting that the central bank would devalue
its currency amid a rapidly weakening rate on the black market.
Bankers and economists have said a devaluation could come in an
exceptional auction for a quantity of dollars greater than the usual
$120 million sold weekly.

The rate for Tuesdays auction has not yet been specified.
IMF chief says Egypt in currency 'crisis'

Posted 28 Oct 2016 02:36

IMF chief Christine Lagarde said on Thursday (Oct 27) that Egypt is going
through a currency "crisis," suggesting a quick devaluation to tackle a
widening gap between the official and black market rates.
Egypt has been struggling to shore up its foreign currency reserves in the
political and economic turmoil following the January 2011 uprising that
toppled former ruler Hosni Mubarak.
The government of President Abdel Fattah al-Sisi is rolling out an austerity
programme and is seeking billions in support from abroad in order to meet
conditions for a US$12 billion loan from the International Monetary Fund and
boost investor confidence.
"In terms of exchange rate, there is currently a crisis, because if you look at
the official price if you look at the grey market price, there is a 100 per cent
difference so that needs to be addressed," Lagarde said in an interview with
Bloomberg Television.
Lagarde applauded the planned reforms, including the austerity programme,
saying the IMF was ready to support the government if it takes the measures
needed to meet the loan conditions.
Responding to a question on whether a total free float or gradual devaluation
might be the best, Lagarde said the right conditions were "going to be dictated
entirely by the circumstances".
"When you have very low reserves, when the difference between official and
unofficial rate is very wide, historically we have seen rapid transitions being
most efficient," said Lagarde, adding that "in other cases it has been gradual".
Loans from Saudi Arabia and China would help Egypt gather the US$5-6
billion in additional financing required to complement the IMF lending, IMF
spokesman Gerry Rice told reporters in Washington on Thursday.
"I think they're very close and clearly the financing is one of the aspects that
they need to lock in," Lagarde said, commenting on the loans. "Hopefully
we'll be able to secure the IMF board approval in the next few weeks."