Egypt's economic woes persist beyond monetary measures

Amal Mahmoud , Wednesday 28 Oct 2015

Though Egypt's official reserves stand at around $16 billion, little of that is owned by the government, pointing to the depth of ongoing economic problems

The Central Bank of Egypt's headquarters in downtown Cairo (Photo: Reuters)

As Egypt changes its monetary policy leader, the country’s economic woes persist at a time when the global economy is still struggling to recover, analysts tell Ahram Online, questioning whether the Central Bank has much room for manoeuvre.

Egypt is still struggling to boost its sources of foreign currency following the 2011 uprising that left the country in political upheaval and battered the economy amid slow global economic recovery.

As his term comes to an end next month, Hisham Ramez, governor of the Central Bank of Egypt (CBE), has been subject to harsh criticism from businessmen and importers who claim that his policies fueled the foreign currency shortage, harming importers and hampering economic activity.

“The Central Bank of Egypt almost ran out of tools to deal with the current crisis," said Samer Atallah, economics professor at The American University in Cairo. “On the one hand, it cannot defend the domestic currency and deplete its foreign reserves; on the other, it cannot allow more decline in the pound and consequently a greater increase in domestic prices.”

No choice

“The Egyptian economy got into a vicious circle, where weak economic recovery and foreign investment inflows worsen the currency position and reserves, and measures to deal with the crisis discourage foreign currency inflows,” said Atallah.

Egypt’s Central Bank depreciated the pound four times in 2015. The past week, the pound was devalued by 2.5 percent of its value, to hit for the first time 7.93 to the dollar where banks are allowed to exchange the dollar at 10 piasters above or below that value.

The bank holds regular currency auctions to manage the devaluation process, depleting foreign currency reserves, which stood at $16.3 billion in September, covering three months of imports, or just above the safety threshold.

 “The Central Bank is not responsible for solving such a crisis, all it can do is manage it. Real economy problems have to be addressed,” according to Amr Adly, political economist at the Carnegie Middle East Centre.

“The CBE is in a very delicate situation,” said Atallah.

“The country only owned $1.3 billion of its net foreign reserves, amounting to $18.1 billion in August, whereas the rest represented other liabilities, including the rest of $6 billion in deposits from Gulf countries," stated Hany Genena, economist in Pharos Holding. “This amount must have been lower or even negative in September, when foreign reserves fell to $16.3 billion," he added.

What makes things worse is that, “The global economic context is not in favour of a speedy recovery in the Egyptian economy," notes Adly.

“Economic slowdown in emerging economies and the fall in price of commodities, including oil, have impeded a faster return of foreign investment in Egypt, especially in the oil sector that constitutes almost two thirds of total foreign direct investment (FDI),” added Adly.

“The economic slowdown in Russia and security concerns are not in favour of better pickup in tourism revenues,” stated Adly.

The ailing tourism sector remains hampered by ongoing instability in the region and in Egypt where eight Mexican tourists were killed recently in the Western Desert in a joint police-military force operation that mistook them for militants.

Moreover, the current ceiling imposed on US dollar denominated deposits obstructs profit repatriation and hence discourages foreign investment inflows, a point made by the three economists who spoke to Ahram Online.

In an attempt to contain the growing black market for dollars, Egypt’s Central Bank set, in February, a limit on US dollar denominated deposits, where no individual and business can deposit in banks more than $10,000 dollars per day and $50,000 per month.

Economic impact

The CBE took measures to ration scarce foreign currency available in the banking system through giving importers of basic foodstuffs (formula milk, wheat, etc) and industrial material priority in acquiring foreign currency from banks.

Other importers have a long wait to buy dollars from banks at the official rate, or resort to foreign exchange bureaus that sell at a rate higher than the official one (the black market rate). Importers later on pass the higher costs they incur to consumers through higher prices.

“The structure of Egyptian exports is not flexible enough to benefit from a devalued currency. In addition, some exports depend on imported materials, that are more difficult to acquire due to the foreign currency shortage,” according to Adly.

Imports are more expensive under a devalued currency; yet Egypt’s imports didn't decrease as the country depends heavily on importing basic foodstuffs, fuel and industrial materials.

“Each camp is defending its interests, but the CBE does not take sides. Its decisions are taken depending on economic conditions and taking inflation into consideration,” Ramez told Ahram Hebdo, earlier this month.

Alternative measures

“I don’t see that the CBE should have adopted a faster devaluation. The impact on inflation would have been huge and at the expense of the majority of Egyptians,” according to Adly.

Inflation in Egypt spiked after the government began cutting energy subsidies in July 2014, raising fuel prices by up to 78 percent at the pump.

But since then inflation had slowed down 9.2 percent in September, from a peak of 13.11 percent in May.

“A faster (one-time) and earlier devaluation, right after Egypt received $6 billion from the Gulf countries, would have been more effective than a gradual devaluation and it could have contained the black market," according to Genena.

"At the present time, I’m afraid a devaluation of the pound to reach nine pounds per dollar won't be sufficient in the near term to restore investment confidence and calm the market,” asserted Genena.

“Instead of the US dollar denominated deposit ceiling, the Central Bank could have tightened domestic currency liquidity to reduce the liquidity available for buying dollars and speculation," Genena said.

"It could have done this through raising reserve requirements — the amount in deposits banks have to keep at the Central Bank," he added.

"Unlike the Central Bank, the government didn’t utilise all tools at hand,” stated Atallah.

“Up to $1 billion could have been saved per month — nearly $10 billion a year — if the government imposed restrictions on imports of unnecessary goods," Atallah pointed out.

This would have provided some some breathing space for the country until foreign currency inflows increased, according to Atallah.

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