The Ministry of Finance announced on Monday that there will no longer be a fixed customs exchange rate for non-essential or luxury goods starting from 1 September this year.
The monthly fixed customs exchange rate was introduced in January 2017, following the floatation of the Egyptian pound in November 2016, to bring stability to the prices of strategic and essential goods. The rate has been reviewed monthly by the Finance Ministry.
The ministry said in a statement on Monday that the decision meant going back to using market exchange rates, since the exceptional circumstances that had led to the adoption of a special customs rate had ended with the stability of the exchange market and the narrowing gap between the customs rate and the regular rate announced by the Central Bank of Egypt (CBE).
The customs exchange rate had slightly fluctuated on a monthly basis but had always been lower than the market rate. It was set at LE18.5 to the dollar at its inception in January 2017, when the dollar was trading in the local market at around LE18.75.
The last few months have seen the dollar fall against the pound, reaching LE16.5 on Tuesday. Last month’s customs exchange rate was LE16. The dollar has fallen against the pound by around seven per cent since the beginning of 2019.
Foreign currency inflows, mainly from tourism, have improved the trade balance and foreign investment in treasury bonds, and they have increased the country’s foreign exchange reserves. These factors have contributed to the appreciation of the pound against the dollar.
Egypt’s foreign reserves reached an all-time high of $44.9 billion at the end of July, coinciding with the country’s receiving a final $2 billion tranche of a $12 billion loan from the International Monetary Fund (IMF) under an agreement signed in 2016 to support Egypt’s economic reform programme.
Fakhri Al-Fiqi, an economist and former advisor to the IMF, said that Egypt’s economic reform programme had helped to increase the inflow of foreign currency by contributing to solving the financial difficulties the country has been through over the last few years.
The US dollar has become more available than ever, and demand for it has slowed, he said, adding that Egypt had saved about $3 billion per year in importing natural gas after gas discoveries such as the Zohr field became operational.
Al-Fiqi said that rising remittances from Egyptian workers abroad, exports, Suez Canal revenues, and foreign investment had all helped greatly in bringing the price of the dollar down against the pound.
“Foreign currency inflows from these sources have reached $82 billion, and they are expected to total $95 billion in 2019,” he said, adding that stable pound-to-dollar rates of around LE16 could be expected until the end of this year.
Al-Fiqi also praised the finance ministry’s decision to free the customs exchange rate and stressed that he doubted this would lead to higher inflation as a result. “The decision means there are no expectations of depreciation of the pound against the dollar in the coming months,” he said.
Egypt’s inflation rate dropped to 8.7 per cent in July, its lowest level in nearly four years, down from 9.4 per cent in June.
Ahmed Shiha, a member of the Importers Division at the Cairo Chamber of Commerce, said that the customs exchange rate was only enforced on raw materials and strategic and essential goods, which were mostly not subject to customs fees, making it easier to predict the real cost of the goods.
“I don’t expect prices to increase as a result of floating the customs exchange rate,” he stressed, adding that the small gap between the customs rate and the market rate announced by the CBE over the last few months supported his predictions.
However, he pointed out that traders might take advantage of the floating rate to raise the prices of some commodities on their own, which would be an unjustified move. Economic indicators including Egypt’s credit rating and growth were also looking positive, helping to support predictions of a more stable exchange rate, he said.
The UK Economist Intelligence Unit (EIU) stated in a report this week that growing confidence in the availability of hard currency would provide a much-needed boost to business sentiment in Egypt and help attract foreign investors.
With growth becoming increasingly broad-based and unemployment falling, consumer spending should pick up from 2020, the report said, adding that the development of hydrocarbon resources and processing capabilities could further boost growth in the longer term.
The EIU also noted that Egypt’s economy should continue to grow strongly, with GDP expansion at an annual average rate of 5.5 per cent in 2019-23, the same rate as in 2018-19.
Lower unemployment and an improved investment climate would boost private consumption, the EIU said, although widespread poverty and high inflation could remain constraints on consumer demand.
The EIU cited Egypt’s construction and energy sectors as the main engines of growth. Its report said that the government was pursuing various low-income housing schemes in partnership with private contractors, as well as the construction of the New Administrative Capital to be completed in 2020.
Gas production from the Zohr field, the EIU added, would sharply reduce the need for fuel imports, but capital imports would remain high to support the country’s infrastructure projects. The slowdown in Europe, Egypt’s main export market, might affect tourism and other sectors, it said.
Moody’s, a credit-rating agency, said it was maintaining Egypt’s credit profile at B2 with a stable outlook. The agency, which made the announcement last week, expected the government’s fiscal deficits to continue narrowing as a result of removing energy subsidies and applying a fuel indexation mechanism, and it added that the government’s interest bill should also fall in line with slowing inflation and lower debt levels.
Egypt would continue to be susceptible to tightening financial conditions, Moody’s said, but its declining debt-to-GDP ratio meant that it would be able to cope with external shocks. It said that domestic debt levels were expected to decline as the effects of energy price hikes dissipated.
Moody’s said that conditions in the labour market had improved, with the unemployment rate falling to 7.5 per cent in the second quarter of 2019 from 8.1 per cent in the first.
However, it pointed to long-term challenges resulting from an inadequate number of jobs for a rising working-age population.
*A version of this article appears in print in the 5 September, 2019 edition of Al-Ahram Weekly