The value of the US dollar against the Egyptian pound has long been a major shaper of Egypt’s economic status. The market fluctuations have proven on numerous occasions to the average Egyptian citizen that the dollar rate is linked to the prices of food, fuel, and basic products.
Despite the US dollar currently being valued at more than EGP 9, economists nonetheless believe the pound overvalued due to state regulation, anticipating it will break the EGP 10 threshold in the near future.
The value of the US dollar has risen three times over the past year and continues to inch up, urging the government to replace the governor of the Central Bank of Egypt (CBE) and impose new restrictions on dollar transactions.
The new moves have put foreign companies operating in Egypt in a deadlock. Giant cement producer Italcementi said it is considering moving its regional operations from Egypt due to its prevention from transferring annual revenues outside the country, managing director Bruno Carre told Bloomberg on 6 March.
In the same week, Air France told Reuters they are unable to transfer their earnings after the Russian plane crash in Sharm El-Sheikh last October due to the dollar shortage. British Airways was also reported the same issue.
Moreover, General Motors announced last month it would temporarily close its factory if the crisis surrounding dollar liquidity is not resolved, validating its decisions by stating that banks have stopped opening letters of credit for the import of manufactured cars and the goods required for production.
The issue has similarly affected banking customers, who told the Daily News Egypt that they could not withdraw their dollar savings in local banks this week, even if the account is in foreign currency. Branches say they do not have US dollars so customers end up being unable to access dollars.
In efforts to ease the issue, CBE lifted on Tuesday the monthly cap on dollar deposits and withdrawals for individuals. This compared to CBE’s previously imposed limits on deposits, at $50,000 per month and $10,000 per day.
The latest CBE move was cancelling cap on dollar deposits and withdrawals for companies on Wednesday, according to state-owned Al-Ahram.
CBE battles informal market
Low investment levels and the shaky tourism industry have been the primary causes for the dollar shortage in Egypt, a country that is heavily dependent on imports. The situation has given the unofficial market more control over the available foreign currency.
Owner of a foreign exchange firm in Cairo, Mohamed Omran, told Daily News Egypt the CBE measures are driving importers and companies to resort to the unofficial market to obtain dollars, rather than banks. “They come to us and they know that they will have the amount they need with no caps,” he said.
Omran said several importers buy huge amount of dollars from him “even at higher prices” to meet their business needs.
Head of the General Division for exchange companies at the Federation of Egyptian Chambers of Commerce (FEDCOC), Mohammed Al-Abyad, said in previous statements there is continuous communication between exchange firms and the CBE so as to aid the latter in regulating the exchange market and alleviating the current crisis.
Egypt’s FY 2016\2017 draft budget showed the dollar price registered at EGP 8.25 as the official price, which is believed by economists to increase in the value of the dollar in the informal market.
Dollar shortage threatens doing business in Egypt
Business licences, commitments to protect the rights of shareholders and insolvency are already restricting the business climate in Egypt and hitting the country’s performance in the World Bank’s Ease of Doing Business Index.
Multinationals’ reactions to the dollar shortage have sparked major questions regarding the efficiency of the Egyptian economy.
Head of the Egyptian-Turkish Business Council Adel Lamie said these companies should have addressed their issues with banks before announcing their intentions to exit the market. “It is true that Egypt is suffering from a huge dollar issue but these firms had made a huge amount of profit since they started operating in Egypt decades ago,” he said.
He believes international companies should “stand by” the government and resume their operations: “I’m not talking as an Egyptian citizen here, I’m talking as a businessman; Egypt’s market has huge potential.”
Lamie argued that international petroleum companies that had debt-related problems with the government came up with an “effective solution” for all sides, which did not involve their exit from the Egyptian market.
Political and economic turmoil following the 25 January Revolution in 2011 resulted in the delay of oil and gas payments owed by the government to foreign oil companies. Last October, the value of debts registered $3bn.
The government hoped to reduce it to $2.5bn by the end of 2015 but the deadline slipped several times, pushing the debt up to $4bn last February. “Those companies sat with the government and agreed to schedule the payments over instalments and some of them even increased their investments in the country,” Lamie said.
When the Egyptian economic turmoil “was at its worst” two years ago, multinational companies did not stop their investments, “but their sales increased by billions of dollars”.
CBE introduces extensive measures to control the dollar market
In the past three months, CBE, under the new leadership of Tarek Amer, introduced new measures and policies aiming to strengthen the pound’s value against dollar.
In December, CBE set new regulations for banks to obtain dollars during the CBE’s FX Auctions, held three times a week. Under the new measures, depositors at banks can only withdraw a maximum of $10,000 in foreign currency per day but in practice many banks restrict such withdrawals to far less and demand documents to validate clients’ needs for the funding.
Furthermore, in measures to reduce the $60bn import bill, Amer announced last month a set of new policies regulating the procedure by which importers are provided with foreign currency through local banks.
According to the policy, only imports for which foreign financial institutions issue collection documents directly to banks operating in Egypt will be allowed. Collection documents that are provided by the importer to the Egyptian bank will be declined.
Moreover, the government aimed to limit “non-essential products” in January and came up with measures to control imports with the aim of “protecting the local industry”.
The list of non-essential or “luxury” products comprises 23 categories of products, including dairy products, canned fruits, cooking oil, chocolates, and products that include cocoa, sugary products, baked products, fruit juices, and feminine hygiene products.
Amer’s latest move this month was the launch of US dollar certificates for sale to Egyptian expatriates. The “Bilady” certificates will be available to Egyptian expatriates and will carry a fixed interest rate. The one-year certificate will be issued at 3.5% interest per year, a three-year certificate at 4.5%, and a five-year certificate at 5.5%.
Given these high returns, the products will likely be appealing to investors. Egyptian expatriates remit mainly to cover their families’ daily needs, although a small part is also intended for saving.
CBE measures main reason behind EGP devaluation: Expert
Since the end of the transition period with the election of former president Mohamed Morsi in 2012, the value of Egyptian pound has continued to depreciate against the US dollar, from EGP 6.07 to EGP 7.5.
The devaluation is believed by economists to reassure foreign investors who would like to invest in dollars. Others argued that prices of consumer goods, such as medicine, oil and some food products, will get higher.
After maintaining the same value at EGP 7.14 over the last six months in 2014, the CBE announced in late 2014 it will raise the number of weekly dollar bids. The action caused the pound to devalue, registering EGP 7.32 against the dollar in the formal market.
The US dollar increased in value over the Egyptian pound by 9% in 2015. The dollar’s value had registered EGP 7.18 at the beginning of the year, and rose to EGP 7.83 by the year’s end.
The CBE’s interventions in the exchange market, whether by increasing or decreasing the pound’s value, did not mitigate the lack of dollar availability in banks to cover the customer needs, allowing the parallel market to continue operating throughout 2015.
Banking expert Ahmed Adam told Daily News Egypt that the value of US dollar increases in Egypt due to high demand from importers. “When banks refuse to give importers their dollar needs, they head to the black [informal] market,” Adam said, highlighting this eventually caused the dollar value to skyrocket.
The CBE must amend its recent measures. “If CBE governor Tarek Amer thinks he cannot do anything about the dollar issue, then he should leave,” he said.
Ramez submitted his resignation from his post as CBE governor to the president 35 days before the end of his term. He and the board of directors were supposed to end their tenure on 26 November. This raised many questions regarding the particular timing of the decision.
Upon his appointment, Amer was expected to adjust the exchange market, rebuild reserves, control inflation, creating balance in domestic interest rates, aid banks in the utilisation of their accumulated liquidity, and cover the budget deficit.
Amer is believed to still be away from protecting the EGP. Economy professor at Cairo University Mohamed Youssef advised Amer to increase the interest rates to control the dollarisation process.
However, Youssef said that curbing the devaluation of the pound is not only the CBE’s role, “the government should work on rebounding tourism and the industrial sector to draw foreign currency into the Egyptian banking system.”