Patrick Werr: Wait goes on to see if Egypt will devalue currency

What could hurt Egypt’s economy more than leaving the currency hugely overvalued for five years?

Perhaps it could be for the government to leave the currency hugely overvalued for five years, then to send out signals it is going to devalue, then to leave the rate unchanged after all.

Because of the threat of an imminent and substantial – yet illusive – devaluation few businessmen have been buying pounds to invest in Egypt. They would prefer to wait it out rather than take a hit that could cost them 20 to 30 per cent overnight. Business has been grinding to a near halt as investors wait.

In early July, the central bank’s governor, Tarek Amer, said Egypt’s policy of targeting the exchange rate over the past five years had been a grave mistake, and that to support the currency the bank had needlessly spent about US$22.5 billion in grants, loans and deposits the country had received since the 2011 uprising. He implied – but did not say explicitly – that a devaluation was on the way.

“I will take the decisions that are right from my point of view and bear the responsibility … just as what happened in devaluing the price of the pound [last March] and eliminating restrictions on depositing dollars and other matters,” he said.

Then last month, the IMF announced it had reached a staff-level agreement with Egypt for a $12bn three-year facility to support economic reform.

The IMF hinted strongly – but did not say explicitly – that this would involve a devaluation.

“Moving to a flexible exchange rate regime will strengthen competitiveness, support exports and tourism, and attract foreign direct investment,” the IMF said.

So the cat is almost out of the bag – Egypt is going to devalue its currency.

Well, not quite. More than two months have passed since Mr Amer’s statement, but still no devaluation.

On the contrary, the authorities have stepped up a campaign to severely punish people who buy and sell foreign currency at anything but the official inflated price.

Last month, a law was approved imposing prison sentences of three to 10 years and fines of up to 5 million Egyptian pounds (Dh2m) for black market currency trading.

The authorities have closed down dozens of exchange bureaus, and those that remain open are living in terror. The crackdown initially pushed the currency trade to other less obvious shops down the block. The authorities soon caught on and in the past few weeks began chasing these down as well. Now businessmen who want dollars are buying them very discreetly behind closed doors.

One of these private trades took place in downtown Cairo last week.

A contractor needed to import finishings to complete and deliver a large project he was working on, and he had no legal way to do so, forcing him to resort to the black market.

Big piles of banknotes were pulled out of handbags and exchanged.

This suppression of the black market has only caused dollars to become scarcer, weakening the pound further. The pound has fallen to 12.75 to the dollar from 11 in July, when Mr Amer first hinted at a devaluation.

The wider the gap between the official and black market prices, the greater the return on trades, thus ensuring the black market thrives.

The increasing difficulty importers have in getting dollars and the reluctance of businessmen to invest in Egypt is dampening the economy.

Last month, private business activity contracted for the 11th consecutive month, according to one of the most widely watched measures, the purchasing managers’ index.

Many Egyptian businessmen, despairing that the currency problem will not be resolved any time soon, and fearing that the pound will continue to weaken, have been moving their cash abroad, and an elaborate network has developed to help them do so.

Workers in Arabian Gulf countries who want to send their salaries to Egypt give foreign currency to dealers, who arrange for Egyptian pounds to be delivered to families back home at black market rates. The dealers then deposit the foreign currency into the businessmen’s offshore accounts.

These transactions have become so common and competition among dealers so intense that the commissions they charge, once as high as 4 per cent, have fallen to 1 per cent in recent months, according to one Egyptian businessman.

There is one silver lining to this otherwise dismal economic cloud. Businessmen say there is such a pent-up demand to invest in Egypt, that should the government ever get around to devaluing the currency, investments should surge.

Patrick Werr has worked as a financial writer in Egypt for 26 years.

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