For years people have been told that Egypt's exports would perform better if the Egyptian pound were left to market forces to decide its value rather than being propped up by the Central Bank of Egypt (CBE). In theory, the depreciation of the local currency should allow exporters to reduce their prices overseas, making their goods more attractive to foreign buyers. Now that this has happened and the pound has been floated, experts say that things are not so straightforward, however. The pound was floated on 3 November. This week it was trading at around LE17 to the dollar, having lost almost 100 per cent of its official value before the floatation. China and other countries have long engaged in competitive devaluations known as “currency wars” to make their exports cheaper when priced in foreign currencies and thus allowing them to export more, explained Cairo University professor of economics Omneya Helmi. However, in the case of Egypt production depends much more on imported raw or intermediate inputs. These become more expensive with the devaluation of the pound and increase the cost of production in Egypt, meaning that Egyptian exports could in fact become more expensive and not benefit from the devaluation. Khaled Ramzi, export manager for a durable goods manufacturer, concurred. The floatation had increased the prices of imported goods, and Egyptian industries depended on imported inputs, he said. Only products with higher local components would benefit from the devaluation, he added. Ramzi praised the fact that Egypt's export subsidy programme would increase the support given to exporters with a greater local component, however, and said that the price of some Egyptian exports had become competitive with those from China. Before the floatation, Chinese goods were 30 to 40 per cent cheaper than their Egyptian equivalents. In order to compete with them, Ramzi said Egyptian exporters depended on preferential treatment from countries having customs agreements with Egypt. Alternatively, exporters could choose delivery times when Chinese goods were not available. “Not only are we now on a level playing field, but we can offer better quality than Chinese goods,” he added. Ali Eissa, head of the Egyptian Businessmen's Association, agreed. He said the new value of the currency was good for exports and discouraged imports. “Before the floatation, we were supporting Chinese workers and factories,” he said. Egyptian merchandise exports came to around $20 billion in 2015, while imports reached almost $70 billion. While the depreciation of the pound was useful, Ramzi said, the markets were not constant, and he added that they were also shrinking because of the general slowdown in the global economy and increased protectionism. The latter could cause export-oriented economies to suffer, an economist who referred to remain anonymous said, and competition was likely to get tougher in destination markets still open to trade. “We need to enhance our quality, competitiveness indicators, and access to markets to capitalise on the benefits of cheaper exports,” said the economist. In order to boost competitiveness and enable better prices, Ramzi said that less costly quality certification was needed in Egypt. Currently exporters often send their products abroad for certification, which is very costly, he said. He said that quality certification labs should be established in Egypt. Shipping is also costly. Despite multiple ports overlooking the Red Sea and the Mediterranean, Egypt does not have its own shipping lines, Ramzi said. The Chinese subsidise their shipping lines and offer Chinese exporters cheap rates. Though the government covers 50 per cent of shipping costs to Africa, these can take months to recover, Ramzi said. Exporters should also worry about inflation, said the economist. The fact that “inflation is very high in Egypt, relative to major trading partners, means there could be a loss of competitiveness, notwithstanding the devaluation of the pound,” she said. If the inflation rate in Egypt is higher than that in its trading partners, then Egyptian goods become more expensive in comparison. This means that consumers will be paying more to buy from Egypt, explained Helmi. Moreover, an increase in the price level inside the local market may make it more profitable to sell domestically than to export and pay maritime transportation fees and the many other costs related to accessing foreign markets, she added. Egypt's inflation rate currently stands at around 14 per cent but is forecast to grow to 18 to 20 per cent on the back of recent measures including the floatation of the pound and subsidies cuts. The inflation rate in the EU, Egypt's main trading partner, does not exceed three per cent. What worries Eissa even more are the high interest rates in Egypt that discourage investments in the industrial sector. To limit the inflationary impacts of the floatation, the CBE raised interbank deposit and lending rates by three per cent to 14.75 per cent and 15.75 per cent, respectively. Despite such challenges, Helmi believes Egyptian exporters have many opportunities that they need to capitalise on. These include the numerous free-trade agreements that Egypt has with trading blocs such as the European Union, the Common Market for Eastern and Southern Africa (COMESA), the Agadir Free Trade Agreement between Egypt, Jordan, Morocco and Tunisia, the Arab Free Trade Area, and the agreement with Mercosur, a Latin American trading bloc. “Many markets are available, but what we need to do is to produce, produce and produce to be able to export goods of good quality at competitive prices and to deliver on time,” Helmi said.
