Heading South?

Not a day now passes without news indicating the deterioration of the economy, with depleting reserves, a depreciating currency, fuel shortages and higher inflation being only some of the recent headlines.

January headline inflation figures saw the biggest increase in two years, according to figures released this week, jumping to 1.69 per cent month on month compared to 0.15 per cent in December. The annual rate registered 6.27 per cent in January from 4.66 per cent in December.


This may not be the end of it, given the sliding value of the Egyptian pound. Over the past three months, the pound has fallen in value by around seven per cent compared to a four per cent loss over the previous 18 months.

While officially selling for LE6.74 on Monday, the US dollar was trading closer to LE7 on the black market. The shortage of dollars from official channels such as banks and exchange bureaus is also feeding demand, with last week’s black-market rates going as high as LE7.3.

“It’s a vicious circle,” said one banker, who spoke under condition of anonymity, explaining that banks do not have enough hard currency to meet their clients’ needs, which in turn pushes those clients towards the black market.

People needing to change hard currency into Egyptian pounds are now going to the black market to get more for their money. Exporters, one of the few remaining sources for hard currency, are now unable to withdraw money in cash to exchange it on the black market, the banker said, and this had led them to make connections with importers needing the same hard currency.

“They make the exchanges via bank transfers and get paid the black-market price,” she said. To end this system, the Central Bank of Egypt (CBE) has decided to ban such hard currency transfers, and banks are no longer allowed to provide hard currency for imports of non-essential items such as toys and luxury goods. “Importers of these items go to find the needed hard currency on the black market,” the banker said.

The moves are among several measures taken by the new CBE governor in an attempt to contain the pound’s depreciation. They also include restricting the pound’s movement on the interbank market to LE0.01 against the dollar, instead of a previous band that allowed it to move up to LE0.05. The CBE has also capped the price at which banks can sell dollars to as low as LE0.01 above the official rate.  

However, this has stifled the banks, the banker said, since it has limited their profits. And while they were able to make up for the lower profits with the higher volumes, that is no longer the case. As a result of the very limited trading because of the scarcity of the dollar, the banks are choking, she said.

Since the new CBE governor took over earlier this month he has also altered the schedule of dollar auctions, the recently introduced system of selling dollars to the banks. The effect of this has been to make the market unpredictable, the banker said, adding that “now if I need dollars, I as a bank, do not know when I can get them.”

However, this lack of predictability has also helped cool down the black market, according to the anonymous banker. “The black-market traders did not know what the new governor had up his sleeve, so they began selling what they had in dollars for fear of sustaining losses,” the trader said. “The black market cooled down because of the psychological effect of these measures rather than on the back of the real strength of the pound, which means that they may not continue to be effective for long,” he said.

Mohamed Al-Abyad, head of the Foreign Exchange Bureaus Division at the Federation of Chambers of Commerce, said that “as long as the dollar continues to be scarce, the black market will thrive,” adding that people are now coming into exchange bureaus requesting hard currency to sell at a premium on the black market.

“The foreign exchange bureaus cannot turn these customers down, since this would be considered a fault on their part and they could be closed down.”

Comparing the situation today with that in 2003/04 when the Egyptian pound was officially devalued, Al-Abyad said that things were more difficult today, adding that 10 years ago the political system had been stable, there were no severe shortages in basic goods such as fuel, and hard currency earners such as tourism were unaffected.

Al-Abyad said that the dollar shortage was likely to continue, and the CBE’s efforts could only go so far, especially given the depleting hard currency reserves. “The CBE is Egypt’s piggy bank, and it needs to use its money rationally to ensure that the basic needs of the population are available, while keeping inflation at bay.”

Egypt’s hard currency reserves fell to $13.6 billion at the end of January, a level that is estimated to be not enough for three months of imports of food and fuel items and debt repayments. It is believed that the sum is not wholly in liquid form, as around a third of it is made up by the CBE’s gold holdings.


SHORTAGES OF BASIC COMMODITIES: The depleting reserves and shortages in the country’s hard currency earnings are already affecting the availability of basic items, such as the diesel widely used by public transport and trucks.

Long queues of trucks and microbuses at petrol stations have been seen over the past two years, but the latest shortages are worse than usual, Hossam Arafat, head of the Division of Petroleum Products at the Federation of Chambers of Commerce, told Al-Ahram Weekly.

Arafat attributed the problem to a shortage of financing. Egypt imports 25 per cent of its needs for diesel, and it needs $1.1 billion per month to pay for fuel imports. “The government is dealing with this problem on a day-to-day basis, without planning ahead,” Arafat said, adding that the strategic reserves of diesel that the government claims to possess “do not seem to exist since they are not used when shortages are acute.”

While fuel shortages are felt most acutely, the continued shortage of financing may lead to similar shortages in other items, such as food, highlighting the gravity of a situation that US ambassador to Egypt Anne Patterson recently described as “bleak”.

Speaking at the Rotary Club in Alexandria this week, Patterson said that “if Egypt cannot pay its imports bill, her people will not be missing out on television sets and cars, but on electricity, gasoline and food. In other words, a more careful look at the reserve numbers shows they are not close to what a country like Egypt needs for a smooth-running economy.”

Patterson said that Egypt’s reserves had held steady since July “only because of the regular injections of cash by Qatar and Turkey.” Qatar has deposited some $2.5 billion with Egypt’s Central Bank, and Turkey has deposited $1 billion.

She warned that restrictions on access to foreign exchange with the aim of combating the black market would affect investment in the country and could weaken the banking sector.


NEGOTIATIONS WITH THE IMF: Patterson stressed that talks with the IMF “need to be brought to closure” as one of the key steps to restarting growth. While Egypt is currently negotiating a $4.8 billion loan with the IMF, negotiations have come to a halt several times at the request of the Egyptian government, the latest in November when it failed to implement tax reforms that would have shown that the government was serious about reform.

The government has said that it is updating its economic reform programme before sending it to the IMF. The minister of finance was quoted as saying this week that there were negotiations about suggested reforms being implemented in fiscal year 2014/15 rather than in the current fiscal year.

Meanwhile, Wafa Amr, an IMF spokeswoman, told the Weekly that “we understand that the Egyptian authorities are in the process of updating their economic programme and adapting it to the current economic circumstances. The authorities also want to ensure that the measures put forward are both adequate to respond to the economic and financial challenges and consistent and compatible with their political imperatives.”

“Once this step is completed, we will discuss the timing of a possible mission to Cairo to assess the revised programme.”

In her comments, Patterson reiterated what many supporters of the loan believe, namely that reaching an agreement “will unlock IMF funds and financing from other sources, including the US government, and more importantly it will send a strong signal to the investment community that Egypt is committed to reforming its economy.”

“The IMF agreement’s biggest impact will be as a catalyst, encouraging additional lending and sparking interest from short-term portfolio investors, then perhaps longer-term portfolio investors, and then eventually a return of badly-needed foreign direct investment,” she said.


POLITICAL STABILE IS A MUST: However, some observers believe that neither the CBE’s efforts nor the loan will go far enough if the current political turmoil continues. Al-Abyad said that “without a state, the situation will continue to deteriorate.”

Others have called for the country’s political forces to put aside their differences and focus on the economy. Mohamed A. Al-Erian, CEO and co-chief investment officer of the investment company PIMCO, recently sounded the alarm about Egypt’s economy in an article entitled “Egypt’s Economic Siren” on the website of Project Syndicate.

He urged Egypt’s political elite, whether in government or opposition, to adopt “a more collaborative approach to solving Egypt’s problems,” saying that this was “in the country’s collective interest, as well as in their own individual interests.”

Al-Erian also highlighted that “no durable economic and financial solutions are possible without cooperatively addressing the country’s political quagmire. No matter how well intentioned and gifted, technocrats cannot ensure proper policies and deliver optimal outcomes.”

“They need the backing of a unifying national vision, credible leadership, and citizens’ support.”