Egypt resorts to drastic proposals to solve dollar crisis

Egyptians are at odds over how to solve the country's fiscal crisis, with parliament speaker Ali Abdul Aal calling for shutting down currency exchange companies.

al-monitor A policeman walks past a currency exchange bureau in Cairo, Aug. 3, 2016. Photo by REUTERS/Mohamed Abd El Ghany.
Ismael El-Kholy

Ismael El-Kholy


Topics covered

us dollar, money, international monetary fund, foreign investments, egyptian parliament, egyptian economy, egyptian currency, central bank

Aug 26, 2016

The Egyptian economy has been suffering since the January 25 Revolution in 2011, in light of the US dollar supply shortage, which is controlling the Egyptian import market. Last year, Egypt's imports amounted to about $65 billion, underscoring its demand on foreign currency.

Before January 2011, Egypt’s economy relied on several key sources, most prominently tourism and foreign investment — two sectors currently in sharp decline.

The political circumstances resulted in a severe decline in the Egyptian pound compared to the US dollar. In January 2011, $1 was worth 5.818 Egyptian pounds. Today, however, $1 is officially worth 8.88 Egyptian pounds, while the estimated price on the black market ranges from 12 to 13 Egyptian pounds.

Egypt is trying to obtain US currency by borrowing it, as well as trying to control the US dollar on the Egyptian black market.

This month, the Egyptian parliament approved a draft law amending some provisions concerning the Central Bank of Egypt and the banking system, whereby those who manipulate foreign exchange rates can be imprisoned for three to 10 years and fined 1-5 million Egyptian pounds.

At the same parliament session Aug. 9, parliament Speaker Ali Abdul Aal said Egypt needs to quickly prepare a law to eliminate exchange companies, calling them “a cancer destroying the structure of the Egyptian economy.”

The suggestion was met with criticism from some Egyptian parties. The Egyptian Democratic Party stressed that such a move would be “a danger to internal and external investment,” while the Justice Party said, “The government will face a crisis in controlling the banking market.”

An employee at a Cairo currency exchange company recently told Al-Monitor on condition of anonymity, “The elimination of exchange companies will lead to a further deterioration in the banking sector’s situation, and the black market will be even more active than it is today.”

He added, “I do not deny the fact that exchange companies do not abide by the official rate when buying and selling US dollars, but the employees refuse to sell at the rate determined by the state because it is not logical. We need to provide the US dollar for those who need it, like importers and such, and sometimes a unified black market price is set by exchange companies.”

The employee continued, “If exchange companies are to be eliminated, this price will no longer exist. Things will become more random, and the dollar will rise from 12 to 25 Egyptian pounds on the black market.” He added, “The current crisis is present because Egyptians are dealing with the US dollar as a rare commodity, while the banks are not giving this currency to traders. The demand is growing, and there is no solution.”

Ahmed Abdel Hafez, the head of the Department of Economics at October 6 University, said getting rid of the companies would only make things worse.

“The elimination of exchange companies is unreasonable and unacceptable. We have funding problems, and the elimination of these companies will double them,” Hafez said.

“The parliament did well by rationing and [increasing] penalties, but eliminating exchange companies would be hard,” he told Al-Monitor. “Perhaps we can close them at a later stage, but not at the moment. Egypt has entered into an agreement with the International Monetary Fund for a loan of $12 billion, which may solve the crisis.”

Abdel Hafez said, “It is possible to connect the exchange companies to the central bank through an online system, and the banks can even become contributors in exchange companies in order to control them, but closing these companies down will push their staff to sell the US dollar on the streets or in clothing and grocery shops. It would be similar to drug trafficking; no matter how hard it tries, the state will fail to control the situation.”

He believes Abdul Aal does not really want to eliminate exchange companies, but “he was angry at these companies because they are hysterically raising the [US dollar] price. Such a law cannot be passed.”

Meanwhile, Ayman Metwally, the chairman of the Egyptian Association for Financing and Investment Studies, believes that the solution to the current crisis does not lie in eliminating exchange companies but rather in revitalizing foreign currency sources.

“The dollar sources were foreign tourism, the Suez Canal and Egypt's exports of oil,” he said. “Tourism is suffering and so is the Suez Canal, and now Egypt has become a pure importer of oil rather than an exporter.”

Metwally thinks Egypt must determine the necessary imported goods and restrict goods deemed unnecessary, objectively, as long as the person sorting the imported goods is a specialist and not a government employee. Only goods with no available alternatives would be imported.

Addressing the idea of closing exchange companies, Metwally said, “This is not a solution. This will drag us back to the 1980s. We will see a closed market, and the random exchange of currency will thrive.” He added, “Some of the countries that closed their markets reopened them while others collapsed completely, such as the Soviet Union.”

Metwally excuses the governor of the central bank for this current crisis, despite the drop in foreign currency reserves, because the governor has to import primary goods every month.

Abdul Aal’s suggestion of eliminating exchange companies was fiercely criticized because some are concerned about the obviously negative repercussions. Even if the proposal goes nowhere, Abdul Aal’s statements raise questions about the way the state is attempting to solve the crisis.

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