Egypt’s strong currency stance is having knock-on effect on economy

The main argument heard for Egypt not devaluing its currency has been that this would cause the price of imported goods to rise, causing undue hardship for the poor.

But the only imports the currency peg has made relatively inexpensive are those on the central bank’s priority list. The price of just about everything else has been made more expensive, as importers are forced to scramble to find foreign currency on the black market or to wind their way through the central bank’s growing list of restrictions on how the currency can be used.

Poultry and meat, grains, edible oil and tea make the priority list. So do capital goods, spare parts, components, as well as raw materials for industry, especially pharmaceuticals. But even these goods are often delayed and restricted as the government searches for scarce foreign currency, importers say. That means their price on the domestic market does not always reflect the favourable exchange rates set by the central bank.

If the goods and services from abroad are not on the priority list, well, good luck.

The flow of these commodities to the Egyptian market has been dwindling or simply drying up, causing prices to increase faster than they would have had the government left the exchange rate alone.

And it is not simply the lack of supply that pushes prices up. A whole new layer of bureaucracy has been added to the purchase of goods from abroad, increasing the costs in time and money that importers pay. You can be sure that the importers are passing these on to consumers.

The bottleneck tightened when the central bank declared war on Egypt’s thriving black market in foreign exchange in January. Since then, importers are only allowed to deposit the equivalent of US$50,000 a month into their bank accounts towards imports each month, and no more than $10,000 per day.

One businessman estimates that it now typically takes him two months to import a consignment of goods rather than one previously, as he scours the black market for currency then feeds it into his bank account. Other businessmen have been opening up bank accounts at multiple banks to get around the $50,000 restriction, but at the cost of time and energy.

One product that has not been getting into Egypt like before is personal computers. In the second quarter, imports of personal computers fell 32.4 per cent from the same period last year, according to International Data Corporation, a technology research firm. The currency restrictions played a significant role in the decline, it said.

That is dangerous because businesses and industry need computers to expand production. If factories in Egypt don’t churn out more products, the prices of these products will increase, boosting inflation.

Egyptian industry as a whole has been suffering from a scarcity of imported parts and raw materials. Not only does this fuel inflation at home, it hurts exports. According to Al Borsa newspaper, non-oil exports last month fell 20 per cent year-onyear, the eighth month of decline in a row. Exports in the first eight months of this year tumbled to $12.5 billion, from $15.4bn for the same period last year.

Businessmen are becoming increasingly vocal in calling on the central bank to let the Egyptian pound slide. This prompted Ashraf Salman, the minister of investment, to reassure a recent Euromoney conference on the economy that the currency would have to be devalued. This caused the pound, which was already weakening on the black market, to slide even further.

After Mr Salman’s statement, Hisham Ramez, the governor of the central bank, furiously denied any plan for a currency devaluation, prompting the cabinet to state that Mr Ramez and the central bank alone were responsible for currency policy. But despite this, Mr Salman kept his job in a cabinet reshuffle a few days later.

Mr Ramez, whose four-year term as governor is due for renewal on November 23, has increasingly identified himself as the architect of the strong currency policy. In an interview with the CBC television station, he dismissed a call by the IMF to adopt a more flexible monetary policy as routine, asserting that not everything the IMF says is correct. He also said that Mr Salman’s comment had caused the US dollar to skyrocket against the pound, but the central bank was able to bring it back under control.

“The statement was unfortunate and does not express the view of the central bank. The government does not interfere in the central bank’s work,” said Mr Ramez.

Patrick Werr has worked as a financial writer in Egypt for 25 years

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