Is the CBE the only player to blame for the dollar crisis?

The Central Bank of Egypt’s (CBE) policies to prevent the further erosion of the country’s foreign currency holdings have garnered scrutiny from investors, importers, and citizens who fear the loss of the right to withdraw their own money. Following the recent evaluation of the dollar, the bank faced criticism once more; this time from citizens who fear the inflation of goods in the market.

In a recent press conference, prominent economist and chief economic adviser at Allianz Mohamed Al-Arian warned that the country is risking over-dependence on the CBE to make the country’s monetary decisions.

Al-Arian  focused on this reliance, an issue that has been unclear within the scope of Egypt’s business sector: is the CBE the only player to blame for the country’s dollar crisis?

The scarce dollar

There has been a dollar shortage in Egypt since the 25 January Revolution in 2011, with the subsequent political tension and security issues driving foreign investors and tourists away from the country. International reserves have been eroded in the intervening period, falling to $16.4bn.

Foreign investments, Suez Canal revenues, oil exports and tourism have been the only stable sources to provide Egypt with foreign currency. This liquidity, mostly in the form of US dollars, leaves the country as imports  insured using US dollars and the Egyptian government repays its debts.

The CBE cannot take all the blame for the unavailability of the dollar, said the chairman and CEO at Dcode Economic and Financial Consulting firm Mohamed Farid. Rather, he contended, the lack of liquidity is the fault of dollar generating economic activities.

“I disagree with [the claim] the CBE has to make the dollar available,” Farid said. “Its role is to manage dollar pricing.”

In recent announcements, business tycoon Naguib Sawiris made statements against the central bank, saying that the evaluation of the US dollar against the Egyptian pound is not the real problem.

“The market defines the real value of the dollar, the supply and demand,” he added.

Absence of tourism

The tourism sector took a hit after the January 2011 revolution and has failed to recover to its previous rate. Arrival rates have continued to deteriorate. While some improvements were recorded, they have been inconsistent.

The Egyptian government launched several campaigns to attract foreign tourists, with a particular campaign for tourists from Arab countries, but repeated militant attacks continue to derail these efforts.  The government has increased expenditure on security, with the Ministry of Tourism allocating $32m to boost security measures.

Despite the Tourism Ministry’s announcement in January, the arrival rates did not pick up. In March 2016, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced that only 363,500 tourists arrived in Egypt. The January 2016 arrivals rate was 46.3% lower than the January 2015 rate, where 677,000 tourists arrived.

In January 2014, 642,000 tourists arrived to Egypt, while, in January 2013, 903,000 arrived.  In January 2012 and January 2011, approximately 800,000 and 1.3 million arrive respectively.

Put in a larger context, using month on month comparisons, these arrival numbers show how tourism is no longer a dependable source for the influx of foreign currency and that the upward trend of Egypt’s tourism sector seems long gone.

In 2010, 14.3 million foreign tourists arrived to Egypt.  In 2011, 9.8 million tourists arrived, a 31% decline.

The 25 January Revolution has continued to influence the sector and until this moment, it is still unable to reach the 2010 arrival levels. In 2012, arrivals were 19.58% lower than 2010 and in 2013 they was 33% lower the 2010 arrival rates. In 2014, the arrival rate were 30.7% compared to 2010, while, in 2015, the rate was 34% lower than the 2010 peak.

The sector went from gaining $12.5bn, in 2010, to $8.8m, in 2011, and $11bn, in 2012. A notable drop in revenue was registered in 2013 and the sector only brought in $5.9bn. Revenues increase in 2014, recording $7.3bn, only to deteriorate in 2015, bringing in $6.1bn.

With the current low arrival and occupancy rates the sector faces, the CBE intervened to support the ailing tourism sector. It issued a decision in February ordering a three-year payment deferral of debts owed by the parties in the tourism sector to banks.

This initiative included the establishment of a special unit at the CBE to lead a  debt-restructure for members of the tourism sector. The unit is to be activated in mid-March.

Low trade movement

The lack of foreign currency liquidity has not only been attributed to the decline of tourism. Maritime trade has been receding for years. The Suez Canal, a major source of hard currency, was hit by recession in 2015 after the decline of oil prices and political insecurities faced by neighbouring countries that are on the route to the Canal. Previously excepted growth was not achieved.

“Global shipping activity has been in recession since 2008,” an executive at Lloyd’s Register Marine, a leading provider of marine classification services, told Daily News Egypt.

“Ship owners cancelled approximately 40% of new manufacturing orders, even though they had paid advances on the contracts,” said the company’s Operations Surveyor in Charge of Egypt Mohamed Rehab.

“The cost of ship rentals should have gone down with the fall in oil prices, but the recession kept them up. All navigation companies are dealing with poor economic conditions, not only domestic ships,” he added.

Transportation professor at Ain Shams University Mohamed Balah stated that the deterioration of security status in Yemen and the deterioration of the oil price suppressed the use of maritime transportation in global trade.

The Gulf of Aden, a part of the route to the Suez Canal, is bordered by Yemen.

“All this [political insecurity] led the insurance on ships to increase making it an expensive means of transportation,” Balah said.

The navigation traffic data for November 2015 issued by the Suez Canal Authority revealed a decline in revenues for the third consecutive month since the inauguration of the New Suez Canal on 6 August.

Revenue for November was recorded $408.4m, compared to $448.8m and $449.2m during the months of September and October, respectively. Revenue fell at a rate of 7.7% compared to November 2014, which witnessed revenue of $442.8m.

For 2015, the canal recorded revenue of $5.175bn, in 2015, which is a 5.3% decline from the previous year in which revenues were recorded at $5.465bn.

According to the Suez Canal Authority, this decline was due to the devaluation of international currencies against the dollar.

The authority depends on the International Monetary Fund’s reserve asset, the Special Drawing Rights (SDR), which measures the averages of four currencies under one umbrella: the dollar, yen, euro, and sterling pound. The SDR unit declined by 7.9% to a value of $1.40 compared to the 2014 value of $1.52.

Since the beginning of 2016, the average number of ships traversing the Suez Canal per month did not exceed 285 ships per month.

Rehab said, however, that the number of ships will increase to 65 per day in the beginning of 2017, adding that the daily capacity of the canal is 100 ships.

Balah agreed, stating that regaining security in Yemen, along with any improvement in the price of oil, would increase the rate of trade movement through the Suez Canal..

Where did the CBE go wrong?

Attempting to limit further erosion to Egypt’s foreign currency reserves, the CBE capped daily withdrawals of individuals to $10,000, while companies were limited to withdraw $30,000. In March 2014, the CBE limited deposits for both individuals and companies to $10,000 daily, on the condition that monthly deposits would also not exceed $50,000.

Former CBE governor Hisham Ramez took several steps that “destroyed the Egyptian economy”, the former head of the economics department at Suez Canal University Hamed Morsi said.

Morsi added that these attempts to salvage the investment appetite are nothing but a “media show”.

Addressing previous steps the CBE has taken to attract foreign direct investment, Morsi said that “all of those decisions were antidotes and have not worked […] The government’s [steps] are haphazard”.

Farid explained that the CBE is not blameless, stating that there is a link between pricing and availability.

“The price of the currency affects the availability of the currency,” Farid said, adding that the price should reflect the supply. He stressed that the foreign policy should be flexible enough to adapt to the dollar availability conditions.

Instead of controlling the presence of the dollar in the market, individuals and companies, mainly importers, relied on the informal market to acquire US dollars. Banking expert Ahmed Adam previously told Daily News Egypt that importers, who were turned away by banks, have a high-demand for foreign currency and, consequently, its value skyrocketed.

Foreign investors fear for their businesses

The erosion of foreign currency holdings has affected several international companies.  In early March, cement producer Italcementi told Bloomberg that it is considering moving its regional operations from Egypt due to the difficulty it faces in transferring annual revenue outside the country.

During the same month, Air France announced that they were unable to transfer their profits, following the downing of the Russian commercial jet in Sharm El-Sheikh last October. British Airways reported the same issue.

This follows the announcement made by automotive-maker General Motors, which temporarily suspended its factory if the crisis surrounding dollar liquidity is not resolved. The company validated its decisions by stating that banks have stopped opening letters of credit for the import of manufactured cars and the goods required for production.

Reversing previous decisions

Following his appointment as the CBE governor, Tarek Amer removed the caps on withdrawals for individuals. He also permitted companies that import what he termed as essential goods to withdraw and deposit without any restrictions. However, companies that import non-essential products, including many types of nuts and feminine hygiene products, among other things, are still limited to $250,000 monthly deposits.

To limit the levels of withdrawals, the bank permitted the National Bank of Egypt, Banque du Caire and Banque Misr to launch bond certificates for Egyptians living abroad with maturation periods of one, three, and five years. The interest rate, which will be paid in dollars, is 3.5% for the one-year certificate, 4.5% for the three-year certificate, and 5.5% for the five-year certificate.

The bank also announced the issuance of certificates of deposits (CDs) for those living in Egypt, whether Egyptians or foreigners. The CDS will be sold in US dollars and then converted to Egyptian pounds. The certificates will have a maturity date of three years and will accrue interest at a rate of 15% annually. Accrued interest will be paid to certificate holders in three-month increments.

The bank followed those decisions by lowering the value of the Egyptian pound by EGP 1.12.  The dollar currently stands at EGP 8.85 in the official market.

“The decision of the Central Bank to devalue the Egyptian pound against the dollar to match the market is a correct decision,” Economist and chairman of the Arab Private Equity Association (APEA) Hany Tawfik, wrote in a public Facebook post.

Tawfik added that the banks need “ammunition” to fight trading on the informal market. He stated that raising the interest rate on the Egyptian pound at the first opportunity, even temporarily, is essential.

Amer recently said that the bank will consider floating the local currency when foreign reserves hit between $25bn and $30bn.

As the CBE is currently attempting to prevent further erosion of foreign currency holdings and the loss of foreign investors, Egyptians have witnessed another decline in the local currency, bringing the total number of devaluations of the Egyptian pound to 21 in four years.

“A fiscal policy, a monetary policy, an economic policy, and an investment policy are needed to support low income citizens,” Tawfik continued. “The central bank alone is not enough.”

There has been a severe dollar shortage in Egypt since the 25 January Revolution in 2011, with the subsequent political tension and security issues driving foreign investors and tourists away from the country. US dollar reserves have been eroded in the intervening period, falling to $16.4bn.