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CBE devalues EGP amid concerns over inflation and budget deficit increase - Daily News Egypt

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CBE devalues EGP amid concerns over inflation and budget deficit increase

The decision is expected to have far-reaching repercussions on the deficit and inflation of the state budget


The Central Bank of Egypt (CBE) devalued the local currency rate by EGP 1.12 against the US dollar on Monday in the first official price drop since Tarek Amer was appointed governor of the CBE.

The CBE sold $198.1m in an exceptional auction to cover imports of basic commodities at a price of EGP 8.85 to banks, compared to EGP 7.73 in the previous auction last Sunday. The official selling price for the dollar at banks has been set at EGP 8.95 following Monday’s exceptional auction.

The decision is expected to have far-reaching repercussions on the deficit and inflation of the state budget. Moreover, the decision is widely seen to have dealt a blow to the informal market, while questions have been raised with regards to the competitiveness of the Egyptian industry and exports.

CBE aims to bolster investor confidence

The CBE issued a statement on Monday morning delineating the reasons behind its decision, stating that the bank’s decisions are intended to provide the required climate for economic development, job creation, attracting foreign investment, and bolstering confidence in the banking system and its ability to finance major projects.

The CBE’s press release stated that the bank’s decisions are intended to provide the required climate for economic development, job creation, attracting foreign investment, and bolstering confidence in the banking system and its ability to finance major projects.

The CBE is responding to the recent turmoil that has engulfed Egypt in the past four months. In this time period, there has been a decline in foreign exchange flows from tourism, direct investment, financial investment portfolios and remittances from Egyptians abroad.

This general decline in the Egyptian economy coincided with the manipulation by speculators in the domestic money market.

The CBE also contended that the decision will attract foreign currency trade back to Egypt, after trading moved abroad in the past year, due to the bank’s procedures and restrictions. It added that the bank has decided to pursue a more flexible exchange rate to address the distortions in the exchange rate system, which will reflect supply and demand mechanisms.

Through these decisions, the CBE explained, it aims to reflect short-period shifts in the real strength and value of the local currency. Moreover, it expected the reforms to positively impact the Egyptian economy and to bolster foreign exchange reserves to $25bn by the end of 2016.

Moreover, the CBE argued that the measures taken will guarantee the presence of basic commodities on the domestic market, especially those that the government pledges to subsidise and provide for citizens.

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.

Egyptians citizens have reported shortfalls in basic commodities in the past four months due to the dearth of foreign currency and the attendant import restrictions.

Raising the value of the US dollar in banks will affect the price of items citizens buy and increase the rate of inflation (AFP Photo)
Raising the value of the US dollar in banks will affect the price of items citizens buy and increase the rate of inflation
(AFP Photo)

Higher prices, inflation anticipated

Raising the value of the US dollar in banks will affect the price of items citizens buy and increase the rate of inflation, president of the association of Citizens against Price Rises Mahmoud Al-Askalani said.

Speaking to Daily News Egypt on Monday, Al-Askalani said the government does not take into account the effect of their policies on ordinary people.

“The economic policy and the fiscal policy of the state are alienated from one another,” the expert stated, going on to say that the government should have prepared a certain policy to protect low-income earners.

Radya Sayed, 56, a housewife living in Imbaba, said she is concerned regarding the future effect of the decision. “I’m sure the cost of food items and transportation will increase, as has always been the case,” Sayed said.

Eligible Egyptian citizens can receive subsidised food products from supply grocers; the state is spending EGP 34bn this fiscal year on welfare of this kind. However, some commodities, such as rice and cooking oil, were reported to be scarce over the past three months.

“The current government does not think outside of the box and it increases the burden on citizens,” El-Askalani said.

Egypt’s annual inflation rate declined to 7.5% in February from 7.73% in January.

Egypt imports about 65% of its food from abroad (AFP File Photo)
Egypt imports about 65% of its food from abroad
(AFP File Photo)

Importers, exporters in discord

Meanwhile, the decision has elicited opposing responses amid exporters and importers operating in the Egyptian market.

Head of the imports division at the Federation of Egyptian Chamber of Commerce (FEDCOC) Ahmed Shiha claimed the increase in the value of the dollar against Egyptian pound is considered an attempt to halt imports, which will negatively affect industry, commerce and agriculture.

Shiha told Daily News Egypt that the decision would negatively affect the consumer, explaining that more than 70% of the consumer consumption is dependent on imports.

Egypt is largely dependent on imports, particularly in securing food commodities, such as wheat. Egypt imports about 9m tonnes of wheat annually and 6m tonnes of corn, according to the Agricultural Research Center (ARC). The centre said Egypt imports about 65% of its food from abroad.

“The decision serves the monopolists and smugglers; circumventing the state under the pretext of protecting Egyptian industry when actually they are evading customs,” said Shiha. “The devaluation decision-makers are a failure, and arrogant people damaging the economy.”

The devaluation on the official level will increase the dollar prices in the informal market as this market wishes to make a profit and buy dollar at higher prices than the formal market prices, Shiha said.

Shiha expects that the dollar price will rise in the informal market to EGP 9.50 compared to yesterday when its price was EGP 8.80. He further claimed that the actual value of dollar is EGP 7, demanding that the CBE allow economists work freely without defining a value of the pound.

Conversely, head of the exporters division Sharif Al-Gably said the decision is a positive step and will increase competition between the formal and informal markets.

Al-Gably added that the devaluation will increase Egyptian expatriates’ remittances in dollars, as the gap between the formal and informal markets will be narrower.

Moreover, the decision will encourage export and investment; Egypt must provide a mechanism to manage imports of basic commodities without affecting the imports themselves, Al-Gably noted.

Chairman of FEDCOC Ahmed Al-Wakeel moreover concurred with Al-Gably, stating that the pound devaluation is at a fair price and will lead to the provision of foreign currencies, as well as the reduction of imports. Al-Wakeel added that the decision would positively affect tourism.

The average dollar exchange rate in the informal market on Monday was EGP 8.95 (AFP Photo)
The average dollar exchange rate in the informal market on Monday was EGP 8.95
(AFP Photo)

Informal market transactions cease

Dollar transactions in the informal market came to a complete standstill on Monday.

Head of the general division of exchange companies in the General Chambers of Commerce Federation Mohamed Al-Abyad told Daily News Egypt:”The informal market experienced a complete slump in its dollar transactions on Monday; dollar holders or those who bought it during the last period at high prices are unable to sell it after the price fell below EGP 9.”

Al-Abyad predicted that the black market will suffer from a dollar deficiency after the dollar price in banks rose to the same level as the informal market’s price.

“The National Bank of Egypt and Banque Misr issued savings certificates with a return of 15% for those who concede dealing with the dollar; it is expected that these certificates will entice a large number of dollar holders,” he added.

According to employees at exchange offices, the average dollar exchange rate in the informal market on Monday was EGP 8.95 compared to EGP 9.20 on Saturday and Sunday.

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https://dailynewsegypt.com/2016/03/14/cbe-devalues-egp-amid-concerns-inflation-budget-deficit-increase/
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