Currency woes hinder Egypt’s economy – FT

Finding new customers for his fitness and physiotherapy equipment business used to be the main challenge for Rawi Camel-Toueg.

Now the Egyptian businessman’s biggest headache is securing the dollars needed to import the products he sells.

“We used to be able to import quite simply,” he says. “Now if we need $300,000 the bank asks us to deposit the full value in Egyptian pounds, then we have to take our turn until it can source the dollars. Most of the time they come back to say they can’t do it and they ask us to find half of the dollars ourselves.”

Egypt’s war against its foreign currency black market may have successfully damped the illicit trade in dollars, but it has left many businesses struggling and is being blamed for contributing to the country’s economic slowdown.

Small and medium-sized business owners complain they are being strangled by a shortage of dollars and are unable to fund imports, and analysts say big companies are deferring expansion plans because of difficulties accessing foreign currency.

Tourism receipts and foreign investment, two of Egypt’s main sources of foreign currency, were badly hit by the 2011 revolution, which ushered in an extended period of political upheaval. The Egyptian pound plunged in value against the dollar and a black market in foreign currency revived after an eight-year hiatus.

The central bank has since been battling to slow the currency’s slide. Capital controls limiting transfers abroad were put in place in 2011 and the bank has deployed billions of dollars, largely in support from Gulf states, to maintain the pound’s value. To preserve foreign reserves it introduced a system of auctions in 2012 to make foreign currency available to commercial banks.

Deposits in foreign currency accounts have been limited to $10,000 a day, up to a monthly maximum of $50,000. Priority access to foreign currency is given to importers of food, fuel and medicine; everyone else has to wait in line.

The measures have been partially effective. Although there is still a parallel market, it has been greatly reduced. Mohamed Abu Basha, an economist at EFG Hermes, acknowledged that “most big and priority list companies” were still able to access currency through the banks. But he added that the policy is “a constraint on new investment and businesses outside the priority list” and is one of the reasons behind a slowdown in growth from 5.6 per cent in the second half of 2014 to 3 per cent in the first quarter of 2015.

Walid Gamal El Din, head of the Building Materials Exports Council, said his members were losing sales and missing client deadlines because of difficulties funding imported components. “Our exports have contracted by a quarter this year, partly because of currency restrictions, the shortage of dollars and the artificial strength of the Egyptian pound,” he says.

Complaints also come from importers in priority sectors. A senior official in a conglomerate working in one priority industry said the banks supplied only 70 per cent of their currency needs, it had to buy the rest on the market. He said it has had to resort to extreme measures by opening 80 accounts in an array of banks to be able to make deposits within the limits.

“I have to spend a lot of my time managing this,” he said.

The government relies on its limited foreign currency to pay for wheat and fuel imports, and to meet commitments to external lenders. An emergency plan to beef up power generation and eliminate blackouts has added to currency pressures.

The central bank has maintained the pound at E£7.73 to the dollar since July when it allowed it to weaken slightly in the second of two limited devaluations this year. Foreign currency reserves at the end of August stood at just over $18bn, which covers three months of imports, down from $18.5bn the previous month.

The IMF suggested this month that Egypt might be better served if it allowed the value of the pound to be set by market forces. “Such a move would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism and attract foreign direct investment,” said the IMF.

But Hesham Ramez, governor of the central bank, angrily rejected the fund’s advice during a television interview. “The IMF statement could have been better than this,” he said. “As a state we have our priorities and work according to our conditions, and we do not take diktats from anyone.”

He said the foreign currency crunch was mainly the result of one-off commitments and there would be less pressure in 2016.

“I am making available as much [foreign currency] as possible,” he said. “We have to create investment opportunities to bring investments in. As a state we had basic commitments that we had to discharge.”

Source: The Financial Times