Lamis Ahmed, an Egyptian student attending university in the United States, says she can’t receive money from home thanks to a host of restrictions aimed at stemming the flow of hard currency out of Egypt.
With a full scholarship to the University of Oklahoma, the college sophomore is at least free from worries about tuition, and she works part time to cover living expenses. Still, like many students she relies on parental help for large expenses like plane tickets home.
“My parents have a normal account in Egyptian currency, so my mom asked her friend to transfer money for me. The bank refused that a family friend sends me dollars, they insisted that only my parents are allowed to send me dollars,” she says. Citing Central Bank regulations, the bank — Banque Misr — also refused to allow her mother to open a dollar account without waiting for months. “They couldn’t send me money from Egypt, so my dad’s boss transferred the money to me from Kuwait and my parents paid him later.”
“It’s not a horrible situation,” Ahmed adds, aware that many in Egypt face much worse problems. But it’s stress she and her family could do without — especially when they are already financially strained by the rising cost of sourcing dollars.
Ahmed’s parents are not alone in struggling to find and transfer dollars. With everyone from state-owned importers to multinational manufacturers facing cash flow problems in recent months, Egyptians from all walks of life are feeling the impact of a growing currency crunch.
“Ninety-five percent of the oils that Egypt consumes for the subsidized market are imported. At the moment there is about 50 percent availability,” says Grocer’s Association spokesperson Maged Nady. This means empty shelves for millions of Egyptians who depend on these discounted goods to keep their families fed.
The situation was worse last month, with cooking oil supplies meeting less than 10 percent of demand, Nady says. On February 22, the Central Bank of Egypt and the Supply Minister reached an agreement to help cooking oil importers, and the effort appears to have yielded some results.
Lately, though, as soon as the government makes steps towards tackling one problem, a new one seems to pop up. Just days after taking steps to resolve the cooking oil shortage, Egypt’s government faced public complaints from international airlines who have been unable to repatriate millions of dollars worth of profits. On March 2, officials said they had reached an agreement with airlines, including British Airways and Air-France KLM, allowing at least a portion of the suspended funds to be transferred out of Egypt. Then, on March 6, the managing director of Italcementi’s local subsidiary Suez Cement told reporters the company has been unable to repatriate funds for a year, is having trouble paying suppliers, and may consider shifting its regional hub out of Egypt as a result.
Currency troubles are nothing particularly new for Egypt. Businesses have reported having to resort to the black market for cash to meet operational needs since 2013.
When it comes to hard currency, Egypt has been living beyond its means for years. The country imports more than it exports, running a trade deficit of more than US$38 billion in the last fiscal year.
Egypt’s foreign reserves have shrunk drastically from US$36 billion on the eve of the revolution to around $16.5 billion today. In the meantime, the government has allowed only limited devaluations of the Egyptian pound, controlling the official dollar exchange rate via currency auctions to commercial banks. Then, as now, the supply of dollars through official channels was not enough to meet demand.
The currency black market served as a safety valve. When companies couldn’t get what they needed from their banks, they could buy hard currency on a parallel market, deposit the cash in their accounts, and proceed with business as usual.
In February 2015, the CBE tried to close off this back channel and crush the black market by limiting cash deposits in banks to $50,000 per month — no more strolling in with suitcases full of black market dollars.
These policies haven’t eliminated the black market. While the CBE’s exchange rate has held steady at LE7.73 to the dollar since November 2015, black market prices have surged to almost LE10 per dollar,
Local businesses that import goods or raw materials for processing and sale in the local market were the first to feel the pinch: their expenses are in dollars and their income in pounds, leaving them scrambling to pay for supplies. Such companies had little choice but to cut down on imports — and therefore business — or resort to legally questionable practices, such as setting up shell companies to handle financial transactions.
For a time, international businesses could rely on their overseas branches or headquarters to float them hard currency or arrange payments for imports. But doing so long-term is a bookkeeping nightmare, especially as Egypt turns into a financial black hole that currency flows into but not out of. Company headquarters’ frayed patience can be seen in the recent statements from Suez Cement and the airlines. Electronics manufacturer LG also publicly complained about currency shortages, while automaker General Motors had to temporarily suspend production due to difficulty bringing in parts.
Only companies who get most of their income from exports seem unscathed. “I have my own supply of dollars, so I’m not really affected by currency shortages,” says Mohammed Eshra of textile maker Eshratex, which exports cotton and polyester goods. In fact, the rising value of dollars on the black market means those who have steady access to them are doing well for themselves, Eshra says.
For months, economists have argued Egypt needs to allow a managed devaluation of the pound rather than fighting to maintain a tight peg to the US dollar. “The world is weakening currencies, and Egypt is not,” says Angus Blair, chief operating officer of Pharos Holding. As a result, he says, Egypt is out of step with emerging markets and losing competitiveness in terms of cost.
The US dollar has outperformed other global currencies this year, and because of the peg, so has the Egyptian pound. “If you look at the pound on a trade-weighted basis, it’s actually appreciated by 5 percent since the start of 2014. That’s actually better performance than China’s renminbi,” says Jason Tuvey, Middle East economist at London-based Capital Economics. With inflation factored in, his firm believes the pound is overvalued by 18.5 percent.
To reach market value — and therefore end shortages and kill the black market — Tuvey estimates the official exchange rate needs to drop to around LE9.50 to the dollar.
Doing so wouldn’t come without a cost. Tuvey estimates that such a devaluation would increase inflation by 2.5 to 3.5 percentage points, bringing the annual rate to above 12.5 percent and causing hardship for ordinary citizens. It would also raise the cost of servicing Egypt’s foreign debt.
Publicly, Central Bank governor Tarek Amer has not endorsed this option. Shortly after Amer’s appointment in October, the Bank strengthened the exchange rate and he recently said he would not consider allowing the pound to float freely until reserves reach $25-30 billion — although this statement does not necessarily rule out a managed devaluation.
“That is clearly one way they could go,” Tuvey says of a policy that relies on restricting imports. “But it would involve severely damaging the economy without getting to the crux of the fundamental problem here, which is that the pound is over valued.”
Even textile manufacturer Eshra, who personally benefits from such policies, is skeptical about their efficacy. “These policies are helping local industry, but they are not the solution,” he says. “Now we are trying to control the problem, not solve it.
To really improve industry, Eshra says the government needs to encourage investment. But difficulty repatriating profits and an over-valued currency are off-putting to potential investors. “Given there’s been a fiscal threat of devaluation, investors have been reluctant to put their money in Egypt, and that’s just amplified the problem as well,” Tuvey adds.
On the devaluation front, at least, some see room for optimism. Amer’s tough talk on devaluing the pound may be just a tactic; Tuvey expects the CBE will deny having plans to devalue right up until it does so. “There has to be some sort of surprise element in order to get a positive reaction in the market,” he explains.
A series of policy changes signal that the Central Bank may be preparing to loosen its grip on the pound. Since January the CBE has eased the deposit cap for importers, and waived deposit limits for incoming travelers. On Tuesday, the Bank completely eliminated the deposit cap for individuals. On Wednesday, it waived the cap for importers of “necessities.” Taken together, this means at the very least, the bank is walking back its tough stance on the black market, Tuvey notes. All eyes are on the Central Bank.