Reports that the government has drawn up its draft 2016-2017 budget at an exchange rate of LE8.25 against the dollar, instead of the current official rate of LE7.83, have fuelled speculation that it might officially devalue the value of the pound soon. However, a statement from a Ministry of Finance spokesman on Monday said that it is normal, when drafting the budget, to take into account several possible exchange rate assumptions and to then revise these during the drafting process. “The Central Bank (CBE) does not decide these assumptions,” the statement said. Predictions of a possible devaluation of the Egyptian pound against the dollar are based on the scarcity of dollars on the local market amid high demand, which led the dollar to trade on the unofficial (or black) market at a record high of LE9 last week. The current official price of the dollar is LE7.83, and the CBE allows exchange bureaus to sell it for up to LE0.10 (10 piastres) more than the official value. The record value of the dollar in the black market, mainly in exchange bureaus, was reached gradually and is up from the about LE8.50 to the dollar prior to the CBE's decision on 26 January to raise the monthly ceiling of dollar cash deposits to $250,000 instead of $50,000 for importers of food commodities, medicine, machinery and spare parts. Dollar cash deposits have been blamed, along with other factors, for the country's shortage of foreign currency reserves, which fell to $16.4 billion in December 2015 compared to $36 billion in 2010 before Egypt's period of political turmoil and economic hardship. Meetings were held last weekend between CBE officials and representatives of foreign exchange bureaus, including the foreign exchange division of the Federation of Chambers of Commerce, to try to bring black market rates down. Mohamed Al-Abyad, the head of the foreign exchange division, said it was agreed at the meetings to keep the exchange rates at the exchange bureaus within official bounds and to not speculate on the dollar price to prevent it from going still higher against the pound. Eman Mohamed, a professor of economics at Ain Shams University in Cairo, believes the agreement is unlikely to bring dollar rates down to within official bounds, meaning that the dollar would not exceed LE7.93 after adding 10 piastres, as the black market is controlled by supply and demand. Insufficient dollars are available to cover all local demand, which is why the black market has raised the exchange rate for the dollar, she said. The dollar rate in the black market declined to LE8.70 this week, following the weekend's meetings, but Mohamed believes it is only a matter of time before it goes up again. Al-Abyad said that the drop is backed by a decline in demand from importers as a result of the recent presidential decree to increase customs tariffs on a wide range of imported goods. The decision was among measures announced made by the authorities to ease pressure on the country's foreign reserves by reducing spending on imports. Another decision was taken last month to ban imports of products labelled by the government as “non-essential”, starting in February, with the aim of decreasing the imports bill and easing pressure on the pound. According to the decision, the banned products (which include chocolate, cosmetics, home appliances, wrist watches and bikes) can only be imported if collection documents are issued directly from foreign financial institutions to banks operating in Egypt. This mean that companies bringing such products to Egypt must be registered. Egyptian imports amounted to $61 billion in fiscal year 2014-2015, while exports stood at $22 billion in the same period, putting the trade deficit at $39 billion. As a result of the currency crisis, General Motors (GM) Egypt has temporarily suspended its operations in Egypt, according to Reuters. On Sunday, the news agency reported that a source at GM confirmed that the currency crisis has led it to stop production temporarily, until it can clear imports held up in customs. “There is still some leeway with the government and the banks to solve the issue,” the source said. The issue is related to the dollar crisis and varying dollar rates. The government is currently holding talks with the World Bank and the African Development Bank for $3 billion and $1.5 billion in loans, respectively. The loans are expected to support the budget and ease pressure on the country's foreign currency reserves.
