As pound improves, Egypt floats customs dollar rate

The Egyptian Ministry of Finance recently floated the customs dollar rate, after having imposed a fixed rate in 2017 in an attempt to contain prices after floating the pound.

al-monitor A man walks past a currency exchange bureau advertisement showing images of the US dollar and other currencies in Cairo, April 2, 2019.  Photo by REUTERS/Mohamed Abd El Ghany.

Topics covered

imports, price manipulation, commodities, exchange rate, us dollar

Sep 20, 2019

CAIRO — The Egyptian Ministry of Finance earlier this month announced the scrapping of the customs dollar exchange rate it had set in 2017. Going forward, the rate will be floated.

The Sept. 1 statement noted that the customs exchange rate had only been temporarily fixed to stabilize commodity prices on the domestic market following flotation of the Egyptian pound as part of IMF-mandated reforms in 2016, and due to the volatility of the dollar.

In January 2017, the Ministry of Finance decided to fix the customs exchange rate of the dollar at the beginning of each month. This came after importers' calls to hold down prices, which were increasing due to the pound's flotation. At the beginning of October 2017, the price of the customs dollar was fixed at 16 Egyptian pounds and remained there for more than a year. In December 2018, the ministry decided to float the rate for non-essential and recreational goods and only kept it fixed, at 16 pounds, for commodities.

Yemen al-Hamaki, a professor of economics at Ain Shams University, told Al-Monitor, “The decision to float the Egyptian pound in late 2016 led to a 33% increase in the price of goods. To contain prices in the Egyptian market, especially commodity prices, the Egyptian government fixed the customs exchange price of the dollar.”

Hamaki further explained, “There has been a significant improvement in the Egyptian economy, as shown by the prices of some commodities, which led the Ministry of Finance to free the customs exchange rate of the dollar. The value of the dollar declined in the past months while the value of the Egyptian pound increased. Also, inflation stood at 7.8% in July 2019.” The inflation rate had decreased from 34.2% in 2017 to 13% in July 2018.

“There is no longer any need for two customs dollar prices — one for basic commodities and another for recreational goods — which led to distorted prices that did not reflect the real value of products,” she said. “It is better to set one customs dollar price.”

Hamaki further stated, “The coming period won’t witness a significant rise in prices simply because the [fixed] customs exchange price of the dollar has been lifted. This is especially true because of the spread of markets organized by the government across Egypt.”

An example of one such market is Kolona Wahed (All for One), an initiative by the Ministry of Interior to provide school uniforms and supplies at discounted prices. Hamaki called for more such initiatives because the lowering of prices would lead to competition by prompting independent traders to lower their prices to levels closer to those set on the governmental markets. “Local industry is key to achieving economic stability in Egypt because good local industry can increase exports,” Hamaki asserted.

Wael El-Nahas, an economist and financial adviser to a number of major investment institutions, told Al-Monitor, “The difference between the customs exchange rate of the dollar and the exchange rate price does not exceed 3-4%, which is not a big difference. As the currency exchange rate stabilized during the past months, the customs exchange rate of the dollar had to be floated, at least for the time being, especially considering that the decision to set a customs exchange rate was exceptional.”

The exchange rate of the pound to the dollar has been in decline since the beginning of 2019. In January it stood at 17.97 pounds to the dollar and at 16.60 pounds at the end of August.

“Unless the government takes precautionary measures to control market prices through the Egyptian Consumer Protection Agency, the governmental entity that closely monitors prices and responds to citizens’ complaints, a boom in the prices of non-basic commodities might ensue,” Nahas said.

He warned, “[There could be] an increase in the prices of goods and products that are manufactured using imported raw materials, especially goods that go through several manufacturing phases, such as oil and rice.” He also warned of increased prices for auto parts but stressed, “Commodity prices will not change in the near term.”

Imad Qenawi, head of the importers' section at the Cairo Chamber of Commerce, noted, “[The price of] essential and non-essential goods will increase by about 3%. The fluctuation in prices that will be witnessed in the Egyptian market will [negatively] affect the appetite and purchasing power of citizens.”

“The customs exchange rate of the dollar should be fixed for raw materials and imported goods at the beginning of each month,” Qenawi said, expressing the chamber's opposition to liberating the customs dollar rate. “The liberation of the customs exchange price of the dollar will deepen the recession plaguing the Egyptian market.”

In the event of an economic downturn, Nahas remarked, “To overcome recession, traders should reduce commodity prices without exploiting the fact that there is no longer a fixed customs dollar rate.”

Nahas also explained that the decision to float the customs exchange rate of the dollar will reduce the state deficit as the government will no longer have to subsidize strategic goods by covering the difference between the fixed customs dollar rate and the market dollar rate.

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