Egyptian entrepreneurs have warned that uncertainty over the exchange rate is suffocating business and impeding their ability to plan and invest, as the country endures its worst foreign currency crisis in years.
A series of devaluations since March last year has halved the value of the Egyptian pound against the dollar but failed to boost foreign exchange inflows. A new devaluation is expected, economists and business leaders say. Meanwhile, the dollar shortage has led to a black market in foreign currency.
The crisis began when foreign bond investors pulled about $20bn out of Egyptian debt following Russia’s February 2022 invasion of Ukraine, in a flight to havens.
Gulf states stepped in with $13bn in deposits and another $3.3bn in asset purchases, but portfolio investors have mostly stayed away and the private sector has struggled to fund imports.
Adham Nadim, who heads his family’s company Nadim Group, which makes furniture for hotels and corporate clients, said he was having problems importing crucial inputs such as hinges, accessories and paints.
“Everyone gives me speculative prices based on what they think the price of the dollar on the black market will be if I plan to purchase in two months,” he said. “It is a bigger problem if the project extends to six or 10 months.”
Samih Sawiris, a leading Egyptian tourism and real estate investor, told Saudi Arabia’s Al Arabiya television this month that the foreign exchange situation had deterred him from further investments in Egypt.
“Everyone is waiting for clarity on the exchange rate,” he said, describing the issue as “hurdle number one, two and three” for investors. “How can I know if a project would make profits or losses?” he said. “Which rate should I use — the international [forward] rate, the black market rate or the official rate?”
Central Bank of Egypt figures this month show imports dropped in the second half of 2022 to $37bn compared with $42bn in the same period the year before.
Remittances by Egyptians working abroad, an important source of foreign currency, also declined, from $15.5bn in the second half of 2021 to $12bn in the same period last year. Bankers attribute the drop to people selling their foreign exchange on the black market or holding on to it in the expectation of a devaluation of the pound.
The currency crisis has added to the pressure on a private sector already contending with soaring inflation, which reached 31.5 per cent in April, and a 19 per cent interest rate.
A senior Egyptian banker told the Financial Times that there was significant foreign currency in the country, raised from tourism and other sources, but that people were holding on to dollars in the expectation of getting more for them after a further devaluation.
As part of a $3bn loan package agreed with the IMF in October — its fourth since 2016 — Cairo agreed to move to a flexible exchange rate regime and reduce the footprint of the state in the economy. The fund said recently Egypt was “serious” about making the change.
Egyptian governments have traditionally been reluctant to allow market forces to determine the value of the pound, preferring to deploy foreign currency resources to prop up its value and maintain its stability against the dollar. The aim is to avoid inflation shocks caused by sharp falls in the local currency.
A Goldman Sachs report this month acknowledged Cairo’s dilemma. It argued that the near-term benefits of a depreciation in terms of increased exports and capital inflows “were not clear” and would depend on further economic reforms, while there was a risk of “exacerbating already high inflationary pressures”.
But it said the large parallel market foreign currency premium would result “in unsustainable economic distortions that make periodic devaluations of the pound highly likely in the medium term, regardless of whether the authorities move to a fully flexible exchange rate regime”.
Economists say the central bank wanted to build a foreign currency buffer before moving to a flexible exchange rate. In February the government unveiled a list of 32 state-owned companies it planned to open to private-sector participation by selling mainly minority stakes. Oil-rich Gulf states are the main target market for the privatisations.
However, the programme remains stalled amid reported differences over the exchange rate to be used to value Egyptian assets, as well as the small size of many of the stakes being offered, which would not give buyers management control.
Nonetheless, Mostafa Madbouly, prime minister, said this month the government would raise $2bn in asset sales before the end of June.
The main way to resolve the crisis in the longer term is to increase exports, economists say. “The country needs to move to an export-driven model to have sustained foreign currency revenue,” said Heike Harmgart, managing director for the southern and eastern Mediterranean region at the European Bank for Reconstruction and Development. “For this to happen . . . the private sector should get more room to breathe and grow.”
Nadim agreed the focus should be on industry to boost exports and create jobs. “Industry has not been a priority,” he said. “We are having our most difficult time in 45 years of operation. Today we are looking into a deep fog.”
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