CAIRO, Jan 30 (Reuters) – Egyptians rushed to buy dollars at a new, lower exchange rate on Tuesday, causing exchange bureaux to run short of the U.S. currency, bank and exchange bureau staff said.

 

It was the first day of a new “managed peg” system announced by the government and Central Bank on Monday under which the pound is set at around 3.85 to the dollar, compared with the mid-rate of 3.98 at which it was quoted at Sunday’s close.

 

“It’s a big problem today. A lot of people are buying dollars,” said one bureau official, who asked not to be named.

 

Five out of 13 bureaux contacted by Reuters said they might have a requested amount of $20,000 by late evening on Tuesday but none could immediately grant the request.

 

Three banks, meanwhile, refused to sell dollars, and two offered a maximum of $1,000 on presentation of passport and travel tickets as proof of travel plans.

 

Egypt hopes the new “managed peg” system will stabilise the exchange rate, which had started to decline sharply against the dollar in recent weeks following a gradual slide since a nine-year currency peg was abandoned in May.

 

The 3.85 pounds per dollar rate is the initial one under the new system, but dealers are allowed to quote rates up to one percent either side of this figure. The rate will be recalculated periodically in response to market conditions.

 

All bureaux contacted on Tuesday quoted rates within the narrow band set by the Central Bank, with most offering to sell dollars for 3.885 pounds.

 

MORE BUREAUX CLOSED, BLACK MARKET EXPECTED

Egypt’s official Middle East News Agency (MENA) said on Tuesday that the economy ministry had closed another three exchange bureaux on Tuesday for periods of between 15 days and three months for violating government policies. MENA said 19 exchange bureaux had now been closed for violations.

 

One stockbroker, who asked not to be named, said the new forex rules were also taking their toll on Egyptian equity.

 

“Investors believe that the value of the dollar is higher than that,” he said. The benchmark Hermes Financial Index of shares closed off 221.24 points, or 2.8 percent, at 7,654.34.

 

The measures are likely to lead to a resurgence of a black market, the broker argued. He said the situation might revert to that of the 1980s, when “if you go into a foreign exchange bureau, they will tell you to meet them in a coffee shop in half an hour”. Alternatively, the Central Bank will need to sell dollars to defend the pound at the new exchange rate and this will drain vital pound liquidity from the market and pressure interest rates. “The government is choking the economy,” he said.

 

EFG-Hermes Brokerage said in its daily note on Tuesday that little liquidity was expected in the proposed trading band, after pound-dollar exchange rates breached 4.10 recently.

 

“This situation will most likely lead to an increase in unofficial currency exchange transactions, the anecdotal evidence for which has already been piling up in recent days.

 

“In addition, any aggressive releasing of reserves from the Central Bank will inevitably lead to a negative impact on the recently-recovering domestic liquidity situation,” EFG added.

 

Egypt has only just begun to attract more foreign exchange after a long period of low oil prices and depressed earnings from tourism following a massacre by Muslim militants of 58 foreign tourists in 1997. It has suffered intermittent dollar shortages, as well as pound shortages, for the past two years.