As Egypt’s foreign currency reserves fall, black market in dollars thrives

McClatchy NewspapersMarch 28, 2013 


An employee at a registered foreign exchange office in downtown Cairo stamps dollars for a client. Banks restrict the amount of dollars a client can purchase each month to $5,000.


— In today’s moribund Egyptian economy, a man who calls himself Youssef has become a crucial component to keeping the wheels of commerce turning.

His business is furtive, his source of funding unknown and he’s so secretive about what he does that taking his photograph or publishing his full name is forbidden. He carries wads of cash.

Youssef is a black-market money dealer, selling dollars for Egyptian pounds at a markup. With the Egyptian government desperate to keep dollars in the country, banks are limited in how many they may let their clients have. People who need dollars are willing to pay Youssef more to get them.

He’s become one of the few sources of unlimited capital in Egypt’s flailing economy.

Youssef’s phone rings constantly as he sits in another man’s carpet store in one of Cairo’s busiest markets. He’s well-known in the market, but he won’t sell to just anyone; one must be introduced as trustworthy. No one knows where he gets the dollars; everyone knows not to ask.

Youssef tells the caller he’s selling “the green,” referring to the dollar, for 7.37 Egyptian pounds, compared with the 6.8 rate at the banks. A deal is made and Youssef runs off through the labyrinthine streets to close the deal. With no office, no one knows where he goes to retrieve his stack of dollars.

“If you want $10 million every day, I will get them for you while you’re seated,” he told McClatchy afterward.

Two years of political turmoil has scared off investors and tourists, who had been the main source of foreign currency in this country. That, coupled with an economy floundering in the face of constant political uncertainty, has seen Egypt’s foreign currency reserves dwindle to $13.4 billion, compared with $36 billion just before the 2011 ouster of President Hosni Mubarak. That’s enough to cover only three months of the country’s imports, Ashraf El Arabi, the minister of planning and international cooperation, said in a speech last month at Cairo’s International Book Fair. Many economists fear even that grim assessment is too rosy.

The emergence of a currency black market is the latest manifestation of Egypt’s lawlessness and uncertainty, with a government that seems less capable every day of providing the most basic services.

“Before, whoever got caught dealing would have to forfeit the money and go home,” Youssef said. “But now there is no control over the market at all.”

Where dealers such as Youssef get their dollars is the subject of much speculation. Some think they come from foreign workers in nearby places, such as Libya, or from former powerful figures in the Mubarak government who are looking to make profits off their large savings. With only 10 percent of Egyptians’ money in banks, the economy is largely informal anyway, and cash transactions are common.

While the black market pumps hard currency into the economy, it does so at a cost. For every illegal dollar in the market, the value of the Egyptian pound falls, increasing already-rampant inflation.

In February alone, prices rose 2.8 percent; in the last year, the inflation rate was 8.7 percent, according to a report published by Egypt’s Central Agency for Public Mobilization and Statistics. Food prices are climbing and the cost of imported goods is surging. That’s unlikely to slow if the government can’t stop the hemorrhaging of its foreign currency reserves, the agency’s report concludes.

Stanching the flow of foreign currency is unlikely. The government of President Mohammed Morsi has balked at demands that it cut government subsidies in return for a $4.8 billion loan from the International Monetary Fund. The government argues that such spending reductions would hurt not only Egyptians dependent on government subsidies but also Morsi, whose popularity is plunging as parliamentary elections near.

IMF officials have said that any loan must come with major economic reforms. Masood Ahmed, the director of the IMF’s Middle East and Central Asia department, was in Cairo earlier this month to conduct further talks. Meanwhile, Qatar, which has provided nearly $2.5 billion in loans and grants in an effort to ingratiate itself with Egypt’s new leadership, said earlier this year that it would provide no more money.

The government so far has proved unable to make arrests or curtail the black market. For a conviction, officials must spot someone essentially holding two bags of money – the Egyptian pound and the U.S. dollar – and see an exchange.

Even in the few cases where people have been caught, “there is no prison time, just a fine,” said Mohamed El Abyad, the head of the foreign exchange department of the Cairo chamber of commerce.

Egypt’s black market isn’t a recent development. Mohamed Abu Basha, associate vice president for research at the investment bank EFG-Hermes, traces it to the 1970s, when then-President Anwar Sadat began opening the economy. Before then, the government strictly controlled all imports. Once private businesses could import, access to dollars became a must.

That gave rise to unauthorized currency transactions and opened the way for notorious scamsters, including Ahmed al Rayan, a currency trader in the 1980s who later became well-known as Egypt’s first Ponzi schemer. He served seven years in prison for racketeering.

“The black market can’t emerge unless there is a problem somewhere,” Abu Basha said. “At the end of the day, the whole idea of a black market is the result of a failing policy. . . . In proper countries you want things done through the state’s institutions and a transparent mechanism.”

Egypt lends itself well to black marketeering. No more than 10 percent of business is conducted through banks, Abu Basha said, yet the government’s restrictions on how much foreign currency banks may give a client – $1,000 a day or $5,000 a month – have created a near-panic for cash.

Under the regulations, imports of basic items such as food, medicine, machinery and petroleum products are a priority, meaning businesses that import those items are first in line. Those looking to buy homes or start businesses must turn to people such as Youssef. Before the current popularity of the black market, Youssef said, he sold imported gold.

“Every time the dollar rises because of the black market, the Egyptian pound is less valuable. It is becoming worthless,” Youssef said. “But I do not feel guilty. It’s like someone who works in a bar and is a practicing Muslim,” a reference to Islamic prohibition of alcohol. “This is my job.”

Ismail is a McClatchy special correspondent.

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service