Recent moves by the Central Bank of Egypt have not improved the country's dollar crunch, reports Sherine Abdel-Razek
The Central Bank of Egypt (CBE) held an exceptional dollar auction on Sunday, selling $500 million to the banks at LE7.73 per dollar to cover a backlog of essential imports.
The value of the auction was almost 10 times that of the regular auction the CBE holds three times a week to pump dollars into the country's banking sector.
Observers say that the move was only a temporary painkiller, with one banker saying that the actual daily demand to balance the market is around $1.5 billion. The value of the dollar on the parallel market on Sunday went as high as LE9.75, according to media reports.
Both local and international firms working in Egypt have complained that they are unable to clear imports or repatriate earnings because of the dollar shortage. Italcementi, the owner of Suez Cement, said the company may consider moving its regional hub away from Egypt if the shortage persists.
According to Bloomberg, a market-analysis company, Italcementi has been unable to repatriate profits of 50 million euros from Egypt for about a year and is facing difficulties paying foreign suppliers.
"It isn't an urgent issue but if currency availability remains tight we will have to establish other channels to develop our activities in the region," Bruno Carré, managing director of Suez Cement, told the agency.
"At some point, my foreign suppliers could say that if you're not paying I won't continue supplying," he said.
The same problem is being faced by airlines operating in Egypt, leading British Airways to ask its customers to pay for tickets in dollars this week. And while the Civil Aviation Ministry said earlier this week that the CBE has agreed on payment schedules with the carriers, the uncertainty is weighing heavily on the economy.
Egypt has been suffering from low foreign currency inflows since the 2011 Revolution due to the decline in tourism and foreign direct investment. Foreign reserves have more than halved since 2011 to $16.4 billion this January, resulting in a thriving black market and heavy speculation against the pound.
With the difference between the official and the black market rates now nearing LE2, its highest ever, there has been confirmation from bankers and stock exchange bureaus that part of the increase is being fuelled by speculation rather than scarcity of the currency.
Speculation against the pound has increased in recent weeks despite Egypt receiving some $1.5 billion this year in aid from China and the African Development Bank, boosting its reserves.
Last week, Egypt also launched new "Beladi" investment certificates, to be sold to Egyptian expatriates in dollars at attractive yields. The international ratings agency Moody's, however, was sceptical about the effect of issuing the certificates.
"The sale of these certificates will increase the three government-owned banks' dollar funding, which is credit-positive because the banks' dollar liquidity has tightened in recent quarters. However, we estimate that the increase will be insufficient to alleviate businesses' foreign currency needs," it said.
It explained that while remittances from abroad in 2015 were around $20 billion, according to World Bank figures, the recipients of these remittances usually withdraw the funds from the banks to benefit from higher rates on the unofficial market.
"Even if, for example, 10 per cent were invested in the Beladi certificates, the banks would only raise around $2 billion, or less than one month of imports. We think the latest moves ... suggest that a long-awaited devaluation of the pound may be just around the corner," the London-based Capital Economics said in a note.
"This will inevitably involve some short-term pain, but over a longer horizon it should help to lay the foundations for a period of stronger growth," it said.
Devaluation could bring substantial benefits, according to Capital Economics, but the pound would need to fall to around LE9.5 against the dollar.
"By allowing the currency to weaken, the Central Bank would eventually be able to formally dismantle forex restrictions, while it would also boost external competitiveness and encourage foreign investors back to the country. All of this would help to place Egypt's external position on a more sustainable footing and, if backed up by further economic reforms, should ultimately support stronger economic growth," it concluded.
Mohamed Al-Erian, former chief executive officer at Pacific Investment Management, told reporters at a conference in the UAE last week that Egypt should focus on the valuation of the local currency as it tries to solve its economic problems.
"Egypt does not produce enough, needs continuous electricity, reform of the tax system and pro-growth measures to reduce the deficit," said Al-Erian, a member of the recently revived council that coordinates policy between the government and the CBE.
"The pound's valuation is neither the main problem nor the main solution," he said.
© Al Ahram Weekly 2016
