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Egypt’s central bank to allow trading in NDFs and derivatives

Building, Office Building, Urban REUTERS/Mohamed Abd El Ghany
The measures are designed to smooth operations as the central bank moves towards a more flexible currency market

The new governor of Egypt’s central bank, Hassan Abdalla, has alerted Egyptian banks that it may soon allow them to begin trading in non-deliverable forwards (NDFs) and derivatives for local currency transactions.

The measures, part of a new foreign exchange convention under review by banks, are designed to smooth operations as the central bank moves towards a more flexible currency market, according to banking sources.

Egypt is suffering from an acute shortage of dollars and has long been under pressure from the International Monetary Fund (IMF) to adopt a more flexible exchange rate policy.

IMF managing director Kristalina Georgieva said this week that Egypt was at a “very advanced stage” of discussions for a new financial support package.

The country began talks with the IMF shortly after Russia’s invasion of Ukraine in February prompted foreign investors to pull billions of dollars out of Egyptian treasuries.

Its central bank governor also told banks at a meeting last week that it may remove a 2.25 percent interest rate cap on locally issued US dollar certificates of deposit (CDs) and eliminate the maximum tenure of three years, the bankers said. The central bank was not available for comment.

NDFs are instruments generally used to hedge or speculate on currencies when exchange controls make it difficult for foreigners to trade in the spot market directly.

Until now Egypt has only allowed local banks to deal in foreign currency at the spot rate.

Abroad, Egypt’s current NDF rates indicate markets are expecting the Egyptian pound to weaken against the dollar to just over 24 in one year’s time.

The Egyptian pound was devalued by 14 percent against the dollar in March after being held steady for more than one year at 15.7 to the dollar. It has been allowed to depreciate more gradually in recent weeks and was trading at between 19.59 and 19.67 to the dollar on Wednesday.

Hassan Abdalla served for nearly two decades as chief executive of Cairo-based Arab African International Bank and was instrumental in developing Egypt’s interbank foreign currency market in 2004. He took over as acting governor after former governor Tarek Amer resigned suddenly in August.

One banker said Abdalla seemed prepared to allow commercial banks more latitude to set their own policies.