A series of moves were undertaken by the Central Bank of Egypt (CBE) to limit and eliminate the dollar black market. It did so by devaluating the Egyptian pound in February, from EGP 7.14 to EGP 7.62 to the dollar, and narrowing the distance between the official exchange rate and that found on parallel markets.
The CBE imposed daily and monthly limits on dollar deposits in banks ($10,000 and $50,000, respectively) in an attempt to stifle the foreign exchange black market. It said that the devaluation will also help in slowing the drain on foreign exchange reserves, which shrank by about 10% in a year to $15.4bn.
The CBE surprised the market on 2 July with a sudden increase in the dollar price against the Egyptian pound by 10 piasters. This decision was swiftly followed by another increase of the same value on 5 July.
On 26 August, the value of the US dollar continued to increase against the pound, reaching EGP 7.8 at the CBE, and EGP 8 at exchange companies. Moreover, in February the CBE issued an oral decision to local banks to limit dollar cash for individuals and companies. According to these decisions, companies and individuals will not be able to deposit over $10,000 in a day and $50,000 a month in Egypt’s banks.
The Egyptian pound’s devaluation and new restrictions on cash deposits in US dollars have greatly affected export and investments flow, whether locally or internationally. However, these policies were put in place mainly to eliminate the dollar black market and decrease the drain of foreign cash reserves. It did not, however, eliminate the black market and the reserves increased from the Gulf money, according to some exporters.
CBE policies strangle whole market
Walid Gamal El-Deen, Head of the Export Council for Building Materials (ECBM), said that five export councils submitted a memorandum to Prime Minister Ibrahim Mehleb on 16 August, seeking a review of the CBE’s policies.
Gamal El-Deen said the memorandum requested that Mehleb set the currency price in accordance with supply and demand, not by administrative decisions taken by the CBE. The CBE’s policies wiped out the whole market, he said, rather than just the black market. These decisions were undertaken orally, not transparently, and must be published and clarified.
Gamal El-Deen added that the CBE applied the policies without creating an alternative for the long waiting period to attain hard currency for business. Those decisions will not help to attract foreign investment, due to lack of freedom of transactions in the market, in addition to the lack of dollar liquidity, he said.
Gamal El-Deen attributed the rise of the black market to the lack of investment, tourism revenues and exports, which will not stop by limiting dollar liquidity. Exporters have problems related to raw materials purchases that contribute to the export process, and they are unable to buy raw materials to export their products at a cheap price to stimulate importers.
“The pound devaluation policy is only a quarrel between the CBE and some traders on the black market, but could have been settled in some other way, not by destroying the economy,” Gamal El-Deen said. “It is not required that the world responds to the CBE’s decision. The CBE governor is not accepting our requests to meet him.”
Purchased raw materials do not stimulate export
Mohammed El- Mohandes, Head of the Engineering Industries Export Council, said some countries had to devaluate their currency to stimulate their economies, such as China to increase its exports. However, with the situation in Egypt, exports decreased and imports increased.
El- Mohandes said that the engineering industries are one of the most affected industries by the limiting of the dollar ceiling. He added that these industries heavily rely on the import of certain production requirements, which would be unable to import the required quantities due to lack of foreign currency available to buy these quantities. In addition, the purchased amounts do not meet the needs to stimulate export.
“Exporters didn’t get the money allocated for export support and it was not obtained from the last fiscal year (FY) 2014-2015 funds, and some exporters and factories rely on it,” El-Mohandes said. “Now the factories and exports can rely on this amount of money or calculate it in the cost.”
There is a large exit for local investments from the market without their will, because of the cessation of production and losses, he said, but the entry of foreign investments requires a stable environment. Investors compare between the countries in which to invest, according to El=Mohandes, and Egypt’s market remains unstable due to a lack of hard currency.
“The government should examine the development and support of agencies and sectors that bring the dollar to Egypt. Dollar resources such as industry, development, transfers from workers abroad and the proceeds of the oil should be evaluated in terms of power and shortage, and then encourage and support these sectors instead of making management decisions out of clue,” he said.
Minister of Industry and Foreign Trade, Mounir Fakhry Abdel Nour, met with export councils to increase the value of Egyptian exports. There are, however, obstacles faced by Egyptian exports, although the engineering industries exports increase.
The Ministry of Foreign Trade and Industry plans to rely significantly on the African market to increase the dropped Egyptian Exports, according to him.
“Egyptian industry is on a dangerous slope due to several problems, including problems related to the domestic industry itself, import and export and the problems of decreasing agricultural lands , in addition to the lack of skilled labour,” El-Mohandes said.
SME profits do not exceed EGP 2m in 2015
Some cooperative associations and SMEs operating in areas such as iron and steel, carpentry and others were getting the highest rate of discount from some factories. Their products compete with Chinese and southeast Asian companies, amongst others.
However, those factories refused to give the discount rate for these SMEs, due to a lack of dollar flow. These SMEs also no longer generate more than EGP 2m in profits, after reaching earnings of EGP 16m or EGP 20m.
Most of these small factories and workshops were closed due to unwise policies, El-Mohandes said. He believes that the CBE must take back those decisions.
Khaled Abou El-Makarem, President of Chemicals and Fertilizers Export Council (CEC), said fertiliser exports decreased and some factories were closed because of the shortage of gas, on which the factories run.
Abou El-Makarem added that the gas is directed to power plants, with limits placed on currency exports and the inability to raise required dollar bonds for the purchase of raw materials. This has largely eliminated the black market, although not totally.
“Attracting investment will not be increased through devaluation of the Egyptian pound, but through an increase of security and stability, besides, the development of controls and new investment law regulations,” said Abou El-Makarem.
Meanwhile, Mohamed Farag, Head of the Finance, Investment and Banks sector at Egyptian Junior Business Association (EJB), said that the CBE’s decision to put a roof on the dollar to $10,000 per day and up to a maximum of $50,000 a week was partially activated. However, the CBE did not take into account the investor, which caused a number of problems for importers as spare parts and production materials require foreign currency.
Farag added that there will be a disaster if these policies continue with the lack of currency. He also said that the EJB sent a memorandum to the Ministers of Investment and Industry and the CBE, to review those policies or provide currency to importers.
FDI considers clear economic legislation
“Nevertheless, the government reduced the value of the pound to increase export, the total cost of production process increased due to high prices of raw materials thus the offered price for products is still not attractive,” said Farag. “As well as, foreign direct investments (FDI) are not interested in the devaluation of the pound as clearly interested in economic legislation and methods of contract between the state and the importer, and the availability of currency and convert profits.”
Totalitarian attitudes towards Egypt’s situation are positive for attractive investment due to the availability of political will, he said. There are, however, many obstacles to investment, including the lack of available hard currency and suitable legislative environment.
“We recommend the existence of alternative policies, including work to increase the state resources of the dollar flow, especially in the export of Egyptian products through promotion and help exporters to maintain the product in order to compete,” Farag said. “In addition to this, find other sources besides tourism such as adding some value-added tax on products that Egypt is specialised in, to increase its hard currency proceeds”.
Mohammed Ahmed Rayan, Board Chairman of the Elmasria for Cars Company, said the lack of cars on the automotive market has increased booking lists and periods of receiving some cars. This was, again, due to a lack of dollar availability through letters of credit provided by banks. He added that the car market is witnessing high demand for cars in the absence of supply.
Rayan explained that the crisis of non-availability of cars in the Egyptian market is down to two reasons: the first is the difficulty in opening letters of credit by banks; and the other is the incorrect assessment by agents of their care needs during the year.
Alaa Elsaba, Board Chairman of Elsaba Automotive, said automotive sales in the market has been negatively affected, due to a shortage of supply while the demand by customers has risen. The automotive sector at the present time is outside the CBE’s accounts in terms of opening letters of credit, he added.
Meetings with CBE elicit no response
Elsaba said that the Cairo Chamber of Commerce met with CBE officials to resolve the crisis, but that the CBE has yet to make a response, with the Chamber expecting the long-term continuation of the crisis.
He said the letter of credit crisis caused the cost of financing and purchasing cars to rise, which was reflected in car prices, which reached increase rates ranging between 2.5% to 4%.
“If the CBE’s policy continued, car sales would be decreased during 2015 to 10% compared to the past year,” said Elsaba.
Amjad El-Fiki, Kia sales director at the Egyptian International Motors (EIM), said that dealers and distributors suffer a stop in capital circle of companies, stressing that some brands are experiencing a length of the delivery period.
El-Fiki added that delivering some Kia brands experienced a delay of between 3-4 months. He stated that booking period takes approximately two months, in addition to the 28 days is the period of transferring cars between South Korea and Egypt by sea, and four days for customs clearance, so the booking period has reached three months.
He expected cars prices to rise between EGP 3,000 and EGP 7,000, due to the increase of dollar against the pound.