Egyptian business leaders have warned that exchange rate uncertainty is choking businesses and hampering their ability to plan and invest, as the country endures its worst currency crisis in years.
A series of devaluations it has halved the value of the Egyptian pound against the dollar since March last year, but has failed to boost foreign exchange inflows. A new devaluation is expected, say economists and entrepreneurs. Meanwhile, the shortage of dollars has led to a black market in foreign currency.
THE crisis it started as foreign bond investors withdrew about $20 billion Egyptian debt following Russia’s invasion of Ukraine in February 2022, in a flight to heaven.
The Gulf states stepped in with $13 billion in deposits and another $3.3 billion in asset purchases, but portfolio investors mostly stayed away and the private sector struggled to finance imports.
Adham Nadim, who heads the family business Nadim Group, which makes furniture for hotels and corporate clients, said he was having problems importing crucial inputs such as hinges, fittings and paints.
“Everyone gives me speculative prices based on what they think the price of the dollar will be like on the black market if I expect to buy in two months,” he said. “It’s a bigger problem if the project spans six or 10 months.”
Samih Sawiris, a leading Egyptian investor in tourism and real estate, told Saudi Arabia’s Al Arabiya television this month that the foreign exchange situation had deterred him from further investing in Egypt.
“Everyone is waiting for clarity on the exchange rate,” he said, describing the issue as “stumbling block number one, two and three” for investors. “How do I know if a project would generate profit or loss?” he said. “Which rate should I use: the international one [forward] rate, the black market rate or the official rate?
Data from Egypt’s central bank this month showed that imports fell in the second half of 2022 to $37 billion from $42 billion in the same period a year earlier.
Remittances from Egyptians working abroad, a major source of foreign exchange, also fell, from $15.5 billion in the second half of 2021 to $12 billion in the same period last year. Bankers attribute the decline to people selling their foreign currency on the black market or holding it in anticipation of a pound devaluation.
The currency crisis has added to pressure on a private sector already grappling with rising inflation, which reached 31.5 percent in April, and an interest rate of 19 percent.
A top Egyptian banker told the Financial Times that there was a significant amount of foreign currency in the country, raised from tourism and other sources, but that people were clinging to dollars in the expectation of getting more after a further devaluation.
As part of a $3 billion loan package it agreed with the IMF in October, the fourth since 2016, Cairo agreed to move to a floating exchange rate regime and reduce the imprint of the state in the economy. The fund recently said Egypt was “serious” about making the change.
Egyptian governments have traditionally been reluctant to allow market forces to determine the value of the pound, preferring to deploy foreign currency resources to support its value and maintain its stability against the dollar. The aim is to avoid inflationary shocks caused by sharp declines in the local currency.
A Goldman Sachs report this month acknowledged Cairo’s dilemma. He argued that the short-term benefits of a depreciation in terms of higher exports and capital inflows “were unclear” and would depend on further economic reforms, while there was a risk of “exacerbating already high inflationary pressures”.
But he said the parallel market’s large foreign exchange premium would result “in unsustainable economic distortions making periodic devaluations of the pound over the medium term highly likely, regardless of whether the authorities move to a fully flexible exchange rate regime.” .
Economists say the central bank wanted to build a foreign exchange reserve before moving to a floating exchange rate. In February, the government unveiled a list of 32 state-owned companies it planned to open up to private sector participation by selling mostly minority stakes. Oil-rich Gulf states they are the main target market for privatizations.
However, the program remains stalled due to reported differences on the exchange rate to be used to value Egyptian assets, as well as the small size of many of the shares offered, which would not give buyers managerial control.
Nonetheless, Mostafa Madbouly, prime minister, said this month that the government would raise $2 billion in asset sales by the end of June.
The main way to solve the long-term crisis is to increase exports, economists say. “The country needs to shift to an export-oriented model to have sustained foreign exchange earnings,” said Heike Harmgart, managing director for the southern and eastern Mediterranean region at the European Bank for Reconstruction and Development. “Why does this happen . . . the private sector should have more room to breathe and grow”.
Nadim agreed that the focus should be on industry to boost exports and create jobs. “The industry hasn’t been a priority,” he said. “We are going through the most difficult moment in 45 years of activity. Today we are looking into a deep fog.
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