The Central Bank of Egypt (CBE) recently devalued the Egyptian pound to L.E8.85 to the US dollar compared to nearly L.E. 9 in the black market. Correspondents is trying to understand the crisis and its causes, as well as decisions made by the CBE, by asking a group of economists a number of questions.

Why has the Egyptian pound depreciated?

The Central Bank of Egypt (CBE) recently devalued the Egyptian pound to L.E8.85 to the US dollar compared to nearly L.E. 9 in the black market. Correspondents is trying to understand the crisis and its causes, as well as decisions made by the CBE, by asking a group of economists a number of questions.

Why has the Egyptian pound depreciated?

“The crisis began with the January (2011) revolution,” says economist and investment expert Mohammad Youssef. “Since then, there has been a recession and reduced production. Consequently, exports – the first provider of hard currency – have fallen from US $35 billion to only US $22 billion. Tourism too has suffered a major decline from US $15 billion before the revolution to US $4 billion. And money transfers from Egyptians living abroad, which are the third source of foreign currency, have been cut in half.”

Youssef argues that this collapse in all levels has clearly created a deficit of US $40 billion. The dollar, like any other commodity, is affected by supply and demand and since the demand has increased and the supply has decreased, the dollar has risen over the past five years. The real crisis, he says, is due to conflicting state decisions regarding the Egyptian pound devaluation.

“The state is trying to develop policies to find a way out but its policies unfortunately are only increasing the burden on the government, while a way out is only possible through the private sector, with a few actions to control prices,” says Youssef.

“Many other reasons have triggered the situation, including slowing external support by Gulf states due to rising oil prices, no adequate Egyptian’s political response to Gulf aid, and spending over US $10 billion in weapon deals. Moreover, the state has spent money in dollars on the new Suez Canal where it collected nearly L.E. 66 billion from Egyptians who bought shares in the Suez Canal and then paid the foreign companies working there like Siemens and others in dollars.”

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On January 27, 2016, the CBE raised the foreign currency cash deposit for legal persons from US$50,000 to 250,000 per month, or its equivalent in other foreign currencies, while removing limits on cash withdrawal for imports. And then in mid-February, the CBE raised the deposit limit again to US $1 million per month.

“The CBE Central Bank has tried to open the door for businesspersons and companies by providing securities that prove they have balances to be able to import from overseas,” says banking expert Maha Sharbini. “This will prevent the losses of dozens of companies that already lost billions as a result of accumulated goods at ports due to a lack of dollars and securities.”

She says although CBE’s step is a good one, it is not enough, especially with the ban of importing goods, except through documents from approved banks overseas. This will obstruct import operations, cause companies further losses and lead them to resort to the black market.

Moody’s Corporation, a credit ratings agency, has expected an unabated crisis of dollar shortages within banks in the recent period despite the raise of cash deposit. It points out that although the CBE’s decision aims at increasing dollar liquidity within local banks, it will not be enough to ease the demand for foreign currency, especially since the new forthcoming dollar deposits are still less than the required amount to finance the import of essential goods.

Moody’s said in February 2015, the CBE imposed a limit on cash deposit of US $10,000 a day, and US $50,000 a month to limit black market activities, which importers significantly depend on to manage their needs. Moody’s maintains that the limit has curbed companies’ abilities to deposit dollars in banks, thus reducing the number of imports.

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What about the black market?

“Black markets mainly arise due to the economic policies of the state,” says economist Rida Issa. “The black market gets dollars from two main sources: first there are the importers for whom the CBE makes it easy to deposit dollar deposits to give them financial statements proving their financial position to the exporting companies. Some of these importers sell amounts of dollars on the black market at a price higher than the formal one. Second, top businessmen support the black market and assist it by speculating Egyptian funds transferred from abroad on international and Arab stock markets. Thus, the black market is a natural product of the state’s policies that do not force businessmen to deposit their dollars in banks after imports and exports.”

Issa says the same policies taken by the CBE were already taken under Atef Sedki. Back then, he says, the government managed to control the dollar price. However, at the end of the day, they are mere temporary solutions and cannot be relied on permanently.

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How will Egyptians be affected by a rise in the dollar?

“Any change in the price of the Egyptian pound against the dollar will undoubtedly affect the poor directly and sharply cause their purchasing power to decrease,” says economist Ra’ed Salameh, member of the board of trustees of the Egyptian Popular Current.

“Anwar Sadat linked the Egyptian economy with the international economy by an open policy in the mid-1970s, and then deposed Hosni Mubarak, then followed his steps for 30 years by deliberately making public sector companies lose so they could be sold for cheap prices under the privatization program.

This process was accompanied by the intended damaging of agriculture in favor of import mafias to the point that the gap between imports and exports reached US $35 billion – herein lies the main problem. We no longer make enough goods for consumers neither do we grow enough food, so importing has become an Achilles heel in light of decreased foreign direct investments and tourism. Importing essential goods at a time when the dollar price is out of control will definitely increase the prices of imported goods, especially food, because importers will increase the final sale price, and it is the poor who will suffer.”