With Egypt’s foreign currency reserves dwindling, Rafik Clovis spent December anxiously waiting to see if his bank could secure the $67,000 he needed to finance importing a shipment of auto parts from Europe. It needs to be available yet, so that its imports will be limited in 2022, to only one-tenth of the quantity, compared to previous years.
“The conditions are catastrophic,” says Clovis. “There is no dollar and I have no idea how to solve the problem. I have five employees, and we are surviving, using what we have achieved in the past years.”
Many companies share the same “tragedy” as the Clovis comrade, because of the foreign exchange crisis, after the first three weeks of the Russian invasion of Ukraine sent $20 billion out of flows, as foreign portfolio investors rushed to safe havens, according to the Financial Times.
In the face of the “crisis”
Despite the $13 billion in deposits Cairo received from the UAE, Saudi Arabia and Qatar, and another $3.3 billion from asset sales to the UAE, foreign currency remained in severe shortage in the country whose economy relies heavily on imports.
A week ago, Egyptian President Abdel Fattah El-Sisi announced that banks would secure the foreign currency needed to clear the accumulated imports within four days, without going into details.
According to the Prime Minister, Mostafa Madbouly, goods worth $9.5 billion are still being held at the country’s ports.
The rise in inflation rates after the Russian war in Ukraine led to a parallel rise in the prices of basic commodities such as wheat, of which Egypt is the largest importer in the world, which increased pressure on foreign currency resources in the country, and forced the Central Bank of Egypt to reduce the exchange rate of the pound twice, in March. Then October.
In November, the inflation rate was 18.7 percent, the highest rate in the last five years.
For the fourth time in six years, Egypt has had to turn to the International Monetary Fund, which last month approved a $3 billion loan over four years.
The essence of the agreement with the international donor institution, according to the Financial Times, lies in Cairo’s commitment to moving to a flexible exchange rate system in which market forces determine the value of the currency, something that Egyptian governments have long resisted.
The accumulation of demand for dollars
In an attempt to preserve the foreign currency, the Central Bank placed restrictions on imports in March, including the requirement to use letters of credit for imports, but this step led to the accumulation of unfulfilled requests for dollars, before it decided last Thursday to cancel them.
The value of the pound decreased against the dollar, from about 16 to 24.7 pounds per dollar, while black market rates remain lower than that.
The central bank raised interest rates by 300 basis points on Dec. 22, taking the overnight deposit rate to 16.25 percent, exceeding analysts’ expectations and reversing growing concern about inflation and a weaker pound, according to London-based consultancy Capital Economics.
Businesses from poultry farms to car manufacturers have been hit hard in a country that imports most of its food and many basic inputs for its industries. While policymakers contemplate when and how to move to a flexible exchange rate system, entrepreneurs complain the future is not clear.
In this regard, the head of a company working in the poultry farming sector complained that shipments of grain, especially soybeans and corn used for fodder, are stuck in the ports due to the lack of dollars, adding, “Every day we have to find fodder, and sometimes we run out and the birds do not feed.”
He said that some producers working in the sector had to give up some of their businesses by selling birds at a loss, before they reached the age at which they are usually sent to the market.
And the same spokesman added, “The price was much lower than the cost of production, and he explained that” some competitors had to kill the chicks,” adding that the “significant” decrease in the supply of chicken sold for meat led to an increase in prices by more than 50 percent.
He added that the “significant” decrease in the supply of chicken destined for meat led to an increase in prices by more than 50 percent.
For his part, Mohamed Abu Basha, head of the macroeconomic analysis department at the Cairo-based investment bank EFG-Hermes, said that the shift to a flexible exchange rate cannot happen “overnight,” highlighting that the authorities need to “first, To build up foreign currency reserves to help clear backlogs.
“Expectations and ambiguity”
For his part, the economist at Goldman Sachs Bank, Farouk Souss, pointed to the difficult choices facing Cairo, in its endeavor to provide the necessary liquidity to deal with the growing demand for the dollar, in the short term.
“The central bank can liquidate the market by continuing to raise interest rates, float the currency and restrict the money supply, but the repercussions on prices and growth are problematic,” he said, noting that “the authorities’ preferred option is to wait for inflows from Qataris, Emiratis and Saudis to buy assets in Egypt, but This is also uncertain.
While decision makers consider their options, the outlook for many companies remains uncertain.
In this aspect, a senior manager in a multinational company for the manufacture of auto equipment said that his company was better off than most companies because it was also engaged in exporting, which gave it access to foreign currencies, but he expresses his fear of running out of these reserves, as they remain The company is not sure if it will accept new orders.
He said, “I am not sure that I will be able to filter the imported inputs, to accept a new application, as I will have to pay thousands of port deposit fees, waiting for the dollar.”
“If my overseas supplier agrees to defer payment and I get the goods out of the port, the dollar might rise by the time I have to pay,” he added.
He continued, “It is also possible that the manufacturer of the cars that I supply here will have problems because the process of supplying other parts has failed, so there is no final product and we all lose.”
