The value of the Egyptian pound relative to the US dollar hit rock bottom last week, with US$1 equaling LE10 on the black market on Tuesday — the worst exchange rate in the Egyptian currency's history — while the official market rate for banks sits at LE7.73, far below the LE5.74 mark of November 2010.
Responding to the new black-market rate, officials from the Central Bank of Egypt (CBE) met with currency exchange representatives on Wednesday to seek a temporary solution.
Mohamed al-Abyad, the head of the foreign currencydealers’ division at the Cairo Chamber of Commerce, said that the chamber met with CBE officials to agree on upper limits for the rates they offer customers.
According to Reuters, one exchange bureau said currency dealers agreed not to exceed LE9.25 to the dollar, in exchange for the government allowing dealers to continue doing business unmolested.In February, a similar deal was done, but the CBE revoked the licenses of four bureaus when they exceeded the agreed limit of LE8.6 to the dollar.
While the currency crisis has many causes, the foreign exchange dealers are seen as a particular problem, particularly those that engage in black-market deals, selling scarce dollars above the official rate.
Ahmed Sheha, the head of the importers' division at Cairo Chamber of Commerce, told Egypt Independent that foreign currency dealers are responsible for exacerbating the currency crisis.
“Many exchange offices claim not to have any foreign currency available, but it's a deliberate and systematic arrangement between them and the black-market to raise the prices,” Sheha said.
The pound’s loss in value and the scarcity of dollars in Egypt have hit business hard, while causing concern among foreign companies doing business here. The government’s response to the crisis, meanwhile, has been the subject of much debate and criticism.
Some have urged tighter controls on the flow of dollars and the maintenance of the official exchange rate, while others have urged a relaxation on banking restrictions and a new official exchange rate effectively revaluing the Egyptian currency.
Between January and October of last year, former governor of the CBE, Hisham Ramez took a series of moves that allowed the pound to weaken, although he came in for strong criticism for doing so.
When Tarek Amer took the helm of the CBE in November, he changed course, strengthening the pound by 20 piasters relative to the dollar, a move that surprised markets. Holding an official auction of $500 million, the CBE set the officialexchange rate for banks at LE7.73 and LE7.83 for the individuals.
Since then, the CBE has held weekly dollar auctions to control the flow of dollars through banks and exchanges.
But while Amer has been able to hold the official rate steady, the black market price has continued to slide, causing many to call for an official devaluation of the Egyptian currency from its current artificial rate, a move that many now see as inevitable.
An official source at the Finance Ministry informed Al-Masry Al-Youm that the draft budget for the 2016-17 financial year is based on an exchange rate of LE8.25, indicating that a devaluation may take place by late June at the latest, in time for the new financial year in July. However, observers have said that an official devaluation could take place much sooner.
Economist Magdy Toulba told Egypt Independent that the currency crisis has a range of causes, key among them currency speculation and tough restrictions on bank deposits and withdrawals.
Another big factor, he says, is the struggling tourism sector, which has been hit by numerous terrorist attacks, including the downing of a Russian passenger jet in October, killing 224 people on board.
On Wednesday, the Central Agency for Public Mobilization and Statistics (CAPMAS) reported a 5.6 percent decline in tourists flow to Egypt last year, with 9.3 million tourists in 2015 compared to 9.9 million in 2014.
The drop in tourist numbers has reduced the inflow of dollars to Egypt, making the dollar scarce and pushing its price.
“Add to that the mistaken strategy of borrowing various loans over the last five years at high interest rates,” said Toulba.
He says that various national projects, including Suez Canal Area Development Project, have been funded by large foreign-currency contributions, which has weighed heavily on the foreign currency liquidity.
According to the CBE, at the end of February, Egypt’s foreign reserves fell from to $16.5 billion from $36 billion in 2011.
For a quick solution to the crisis, Toulba says the government should call an immediate halt to imports of unnecessary products, which should be replaced with local alternatives.
Moreover, he says, the government needs to tackle the various problems hindering Egypt's manufacturing sector, thus increasing domestic production and reducing reliance on imports.
“The CBE governor has more solutions available than just controlling the exchange rate and devaluing the currency. They should control both cash transfers and the bank interest rates too,” Toulba said.
One solution that has been tried and now partially abandoned is the imposition of strict limits on dollar deposits and withdrawals at banks, for both individuals and companies.
When the policy was applied by the CBE last year, it proved unpopular with many in the business community, who argued that restrictions on dollar movement caused problems with trade.
However, in an apparent shift in policy on Wednesday the CBE removed those caps for both individuals and importers of essential goods, while keeping them in place for companies that import non-essential goods.
“These decisions are aimed at increasing foreign reserves, enhancing the net cash reserves, and causing the largest possible losses to the speculators,” said Amer, commenting on Wednesday’s policy shift.
Another policy that many think needs to change relates to tariffs on imports. In February, Egypt raised tariff rates on a wide range of “luxury” imports in an attempt to curb dollar spending on imports.
Critics say that the policy has not slowed the importation of luxury items, which are purchased from abroad using dollars, with the result that more dollars are flowing out of the country than before.
According to Toulba, the problem is that well-heeled consumers are still keen to buy their luxury items, despite the price hikes, and this means more dollars spent by importers.
“Do you think the customer who is able to pay $100 on a product will abandon it when the price jumps to $110? Of course not,” Toulba told Egypt Independent.
The Egyptian government has been inundated with advice on how to deal with the currency crisis, while several big names in economic policy have been suggested as worthy of consultation.
A source told Al-Masry Al-Youm that the CBE governor has received reports from “outstanding” monetary experts, adding that the advice was provided in response to a “request from a sovereign state body.”
The reports recommend the cancelation of a dollar deposit cap imposed on companies, as well as taking floatation measures similar to those adopted in 2003 to avoid dollarization.
CBE chief Amer was advised to request pointers from former finance minister Youssef Boutrous Ghali and former investment minister and current World Bank official Mahmoud Mohie Eddin.
Last week, CBE Mohamed al-Erian submitted a paper of proposals to “high-level” state bodies to resolve the US-dollar shortage and strengthen the pound.
Erian warned against "floating" the Egyptian currency, except in co-ordination with various other "decisive economic moves". Such moves could include adjusting imports based on priority, disconnecting the Egyptian pound from the dollar, basing it instead on a basket of currencies, and raising interest rates on the Egyptian pound to avoid dollarization.
