Egypt’s central bank last month went on yet another campaign to stamp out the currency black market by closing dozens of private foreign exchange bureaus around the country. It should rethink this policy, for it will surely backfire and worsen Egypt’s foreign currency shortage. Exchange bureaus are the economy’s heroes, not its villains.
The central bank closed five currency exchange companies on April 27 for "manipulating the price of the dollar and speculating on a very large scale", El Shorouk newspaper quoted an official at the chamber of commerce's currency exchange section as saying. The five companies between them operated at least three dozen branches.
The central bank had closed nine other companies the previous week. While the exchange bureaus are legal, it is technically illegal for them to trade at prices outside those set by the central bank.
The concept of private money changers was introduced in Egypt 25 years ago precisely to make it difficult for the central bank to keep the currency unrealistically strong against foreign currencies. Egypt, like other markets around the world struggling to emerge, for some reason has long believed a strong currency is a matter of national pride.
In the 1980s, Egypt’s foreign currency regime had gotten totally out of hand. The country had multiple exchange rates, with tourists, businessmen and some governments getting different prices for their dollars. The mess made doing business in Egypt difficult, to say the least.
Under the structural adjustment programme it signed with the IMF in May 1991, Egypt began allowing licensed private companies to form foreign currency exchange bureaus. The IMF accord was the condition for a Paris Club agreement that cancelled about US$25 billion of Egyptian debt, a reward for Cairo having sent its military to help free Kuwait from the Iraqi occupation.
The system has worked fairly well over the years, although not without the occasional challenge by the central bank.
Egypt suffered a currency crisis after a 1997 massacre at Hatshepsut’s temple in Luxor chased away tourists, causing demand for the Egyptian pound to plummet. As with the current crisis, the central bank was determined not to let the currency weaken. It first spent all its liquid foreign reserves to support it, then imposed a 100 per cent reserve requirement for letters of credit for imports, then restricted the purchase of foreign exchange. Eventually, it began closing down the money changers.
All this was for naught, because eventually the law of supply and demand won, and the government in the end devalued and then in 2004 floated the currency.
A crackdown on exchange bureaus merely pushes the trade into the back alleys, further weakening the pound as businessmen lose confidence in the way the economy is run.
Once, during the previous currency crisis, I went with an Egyptian friend who wanted to change dollars to buy an apartment in Cairo. She took a bag full of cash to the Cairo manager of a very respectable East Asian company desperate for dollars to keep its operations running in Egypt.
He bought the dollars at a wide premium to the official government price, because he had no other way to get them. Even though he was an elegant executive wearing a superbly tailored suit, the process seemed dirty and humiliating. It was hardly an efficient way to do business.
The good news is that throughout the current currency crisis, which began with the 2011 uprising, the black market has operated quite openly and with amazing efficiency, usually to the annoyance of the central bank. Until a week or two ago, many exchange bureaus would offer the black market rate without the customer even having to ask.
Smaller bureaus would pass any excess currency to larger companies, which would trade among themselves, with a spread between buying and selling of only a few piastres. Now, with much of the trade having retreated to hard-to-find shops that are farther from wholesale dealers, the price is all over the place, and the black market rate has moved ever further from the official rate of 8.86 pounds.
If investors are reduced to switching in and out of pounds in this way, it’s no wonder confidence is waning and demand for the currency is plunging. Businesses need dollars to operate, and until the central bank liberalises the exchange rate they will not be able to get enough of them on the official market. Without a black market, the economy would grind to a halt. The exchange bureaus have kept Egypt afloat.
And oh yes, the charge that the pound is falling because these bureaus are speculating against it doesn’t hold water either. Speculators make money only if their underlying bet comes true. In this case the bet is that the pound will gradually weaken. If it doesn’t, then they are stuck with dollars that are worth less than what they paid for them.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
business@thenational.ae
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