A rise in the euro rate is wreaking havoc on the Egyptian economy, reports Yasser Sobhi The euro has soared against both the US dollar and the Egyptian pound on international markets recently. This appreciation has compromised the position of Egyptian producers, who are already suffering from a local recession and poor investment climate. Last week, the euro reached $1.17 for the first time since the euro was first introduced in January 1999. This was a four-year high and constituted a more than 10 per cent increase in value against the dollar since the beginning of the year. "The increase of the euro rate has made the cost of imports very expensive for both producers and consumers," said Khaled Hamza, chairman of the imports committee at the Egyptian Businessmen Association (EBA). "The market can't handle any further increase. There was a rapid and direct decline in local demand for all products due to an increase in the [price of the] euro, the currency of our main trade partner. The government must provide more euros, and not be totally dollar-oriented." Indeed, two factors have simultaneously contributed to the appreciation of the euro: the floatation of the pound and the rise in euro rates on international currency markets. Hence, the euro is traded in the formal market at around LE6.90. But, because of a lack in availability it has been traded at LE7.15 on the black market. The increase is significant; only five months ago the euro was being traded at LE4.2. Thus, the Egyptian pound has depreciated by almost 65 per cent since the beginning of the year. Hamza explains that most industrial inputs come from Europe and that trade partners insist in conducting deals in euros, going as far as charging extra fees if deals are conducted in dollars. Hamza argues that it would not be easy for Egyptian manufacturers to shift their import markets to the US and Asia, "because of long-term commitments and policies." Importers say the shortage of foreign exchange in the market since the devaluation of the pound last January has resulted in many of their foreign exchange (forex) requests from banks being denied. They complain that they are now being forced to buy dollars on the black market, then change them to euros at banks. This often means that they have to accept an exaggerated dollar-euro exchange rate from some local banks which trade the euro above its international price. Furthermore, exports, with the exception of the agriculture sector, are unlikely to benefit from the currency devaluation. Why is this? "On average, 70 per cent of domestic industry's production depends on imported components. As the costs of production increase, export opportunities decrease. Most important, Egyptian companies face tremendous bureaucratic impediments. This puts them at a disadvantage, regardless of the currency issue," said Hamza. In fact, the Egyptian authorities were not concerned with boosting exports when they took the decision to float the pound on 29 January. Rather, the floatation was designed to combat instability in the foreign exchange market, which was suffering from a shortage in foreign currency and increased activity on the black market. Yet, in spite of the new exchange rate regime, the black market still exists. "The fundamentals of the economy do not suggest or justify the currency market crisis that we are witnessing," said Hanaa Kheireddin, professor of economics at Cairo University. "It's all about confidence. People tend to buy and maintain US dollars outside of the banking system, due to a lack of confidence in economic policy." Recent balance of payments results show that a small surplus of $152 million was achieved during the first six months of the fiscal year, from July to December 2002. But, investors and individuals suffering from a lack of confidence rushed to invest in foreign currencies, mainly in euros and US dollars. Kheireddin suggests that the Central Bank of Egypt (CBE) diversify the foreign currencies in its reserve portfolio in a manner that reflects Egypt's main trade partners: the European Union (EU) represents around 40 per cent of Egypt's foreign trade. If it is not a convenient time to exchange dollar reserves into euros, the government and banks have to deal, at the very least, with EU transactions such as tourism, exports and Suez Canal receipts in euros instead of dollars. "The main focus of the government should be on reactivating the economy," Kheireddin said. "The recession period has been too long and we can't afford more bad policies," she added.
