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An FX Crisis In Egypt

Egypt is in the midst of rebuilding efforts. Its economy has been crippled amid political turmoil this decade, and new leadership has been working to prop the markets back up.

High on policymakers’ agendas is the issue of the foreign currency black market, which sees consumers and businesses exchanging foreign currencies through non-official channels.

Reuters reported last week that while Egypt’s central bank has succeeded in wrangling in the foreign currency black market, small suppliers in the nation – which depend on cross-border trade – have suffered from the crackdown.

Shadow FX Banking

The economy in Egypt has been depleted of foreign currencies following political turmoil, a drop in international trade and a reduction in tourism. According to reports, before the 2011 political uprising that led to the demise of autocrat Hosni Mubarak, Egypt’s economy was growing at 7 percent a year. Post-uprising, that growth slowed to 2.5 percent, though analysts predict that the 2015/2015 fiscal year will yield 5 percent economic growth.

[bctt tweet=”The economy in Egypt has been depleted of foreign currencies following political turmoil”]

In late 2012, the central bank restricted hard currency sales to the market, leading to an expansion of the black market, reports said. Officials have also required lenders to place caps on how much financing they can provide for importers doing business in non-essential industries (essential imports include things like food and energy resources).

Earlier this year, policymakers worked to deplete the shadow foreign currency market by limiting the amount of money banking customers can deposit into their accounts at $50,000 every month, or the equivalent to this value in other currencies.

This means that those that exchange large amounts of money through unofficial channels now have no account in which they can store what they’ve just exchanged, reports said. Depositing the dollars obtained through the black market in a bank account to open a line of credit for importers has become a key way for businesses to stay afloat in the current economic climate, according to reports in the Economist published in February, when the foreign currency restrictions were announced.

Central bank Governor Hisham Ramez reportedly said last May that he has also advised Egypt’s banks to direct more than half of dollar inflows to importers of these essential goods. Reports in Bloomberg said Ramez has defended the foreign currency policy by noting that the central bank “doesn’t have a lot of options in its hands but to ration foreign exchange.”

Unintended Consequences

Analysts say the government’s policies are working, and that the foreign currency black market has been largely squeezed out of existence. But while the plan is a success story for the central bank, and while the International Monetary Fund has reportedly praised the efforts, analysts say the tactic has unintentionally left small business struggling without access to the foreign currencies they need to import goods, machinery and supplies from overseas sellers.

“You did achieve stability in the exchange rate,” said American University in Cairo economist Ahmed Kamaly in a recent interview with Reuters, “but you’ve created shortages and bottlenecks – and definitely over time if it continues, this is going to be harmful to Egypt.”

[bctt tweet=”Over time if it continues, this is going to be harmful to Egypt.”]

The most recent data from the Emirates NBD Egypt Purchasing Managers’ Index, released in July, found that while businesses in the nation did see expansion and new international operations, “the rates of growth were only fractional, however,” the report concluded.

For the sixth month straight, stocks of raw materials and semi-manufactured goods fell. According to Bloomberg, the report also found that Egypt’s foreign currency shortage is the top challenge for businesses in the nation, surpassing militant attacks.

Some small business owners have taken to opening multiple bank accounts to get around these deposit and loan caps. Reports say some SMEs are relying on Gulf Arab banks with branches in Egypt to access foreign currency, while others have simply taken to paying their overseas suppliers late.

For Ahmed Shiha, who heads the Cairo Chamber of Commerce, the latter is a dangerous move. “It’s created a lack of credibility between me and the companies I do business with,” he told reporters in response to more frequent late payments and canceled contracts with suppliers.

Shiha added that it’s difficult to explain to overseas suppliers why payments are so unreliable. “We’re trying to make them understand that it’s not us, it’s a decision imposed on us and the economic conditions of the country that led to this,” he said.

And with tourism still slumping, analysts warn that foreign currency levels in the nation are insufficient, and its impacts on SMEs are slowing economic growth even further. “FX policy remains the key overhand on the market and the broader economy,” said Egypt’s top investment bank EFG-Hermes, Bloomberg said.

“Egypt has all the ingredients in place to build itself as a manufacturing hub, but it seems in the near term or at present that things aren’t going in its favor with currency restrictions,” economist Jason Tuvey of Capital Economics told Reuters.

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