News Analysis: Egypt toughens grip on currency to revive ailing economy

A recent call by Egypt's parliament speaker for drafting a law to permanently close money exchange bureaus to resolve distortions in the exchange rate system might be harmful to the already staggering economy, experts said.

Observers believe that the government's measures against money exchange companies and calls for closing them will further deteriorate the Egyptian economy and increase a U.S. dollar crisis in Egypt.

Egypt is witnessing an unprecedented devaluation of its currency, with the exchange rate of the U.S. dollar once exceeding 13 Egyptian pounds on the black market, the first time in Egypt's modern history.

The CBE has put the official value of the pound steady at 8.78 to the dollar in the official market to bridge the gap between official and black market rates. However, prices at the parallel market kept skyrocketing.

This led Parliament Speaker Ali Abdul Aal to describe exchange companies as a "cancer in the Egyptian economy," urging for shutting them down.

His comments came in a session during which the parliament gave its final approval to amend the law of the Central Bank of Egypt (CBE) in order to increase penalties against companies that sell the U.S. dollar at prices higher than those of the CBE.

"Such policies will not solve the problem," Dr. Abdul Sattar al-Ashra, economic advisor to the Egyptian Commerce Chambers Union told Xinhua. "Monitoring black market dealers is much more complicated than observing an identified number of money exchange companies."

Al-Ashra urged the government to take more punitive measures against companies that violate the law instead of permanently closing them.

"These companies have helped build the Egyptian economy for years and shutting them, especially who committed no violations, will negatively affect the already fragile economy of Egypt," he stressed.

The Arab country, which relies heavily on imports to support its large population, has been suffering from an acute shortage of the U.S. currency in the wake of 2011 uprising which was followed by political and security unrests that have turned away tourists and foreign investors, two major sources of hard currency.

The country's foreign currency reserves over the past five years declined from 36 billion U.S. dollars in early 2011 to 17.5 billion dollars as of the end of May 2016.

In an attempt to fight the dollar price hike on the black market, the CBE has closed 47 of 94 licensed currency exchange bureaus this year for violating regulations and selling the U.S. dollar at the price of the black market.

According to the CBE, a total of 26 companies of the 47 have been closed permanently and have their licenses revoked, while the rest of the bureaus are shut for up to 12 months, according to their violations.

Seemingly, the news of the parliament's willingness to close money exchange companies has angered owners of these firms who accused the government and the parliament of dealing with them as "criminals."

"Shutting down our businesses will have grave consequences," Mahmoud, owner of a money exchange company in Cairo, who only mentioned his first name, told Xinhua. "Such a decision will paralyze an important economic sector in the country and will push tens of thousands of people into unemployment."

Mahmoud added that this measure will affect tourism industry negatively and will turn Egypt into a "closed country."

"What if tourists want to exchange money after banks' working hours!" he inquired, adding that the problem is that most of the companies and shops in Egypt get their payments in cash since they do not offer credit and master cards services.

He explained that the government should distinguish between a black market dealer and an owner of an exchange company, stressing that he has been selling at the rate of the CBE since he started his business years ago.

"Selling at the CBE rate has destroyed my business because customers want to sell dollars at the black markets price ... this has caused a grave recession in my business," Mahmoud, who employs dozens of workers, said.

The man added that a strong and decisive monetary system is urgently needed in Egypt, stressing that such a system will benefit both the government and companies simultaneously.

"If there is a well-organized system, the government will collect taxes from companies selling and buying currencies at legal ways... taxes are an important source of income for governments everywhere," he explained.

The government should force the use of official receipts stamped by money exchange companies for the sale and purchase of foreign currency, he said.

"Then the government can confiscate any foreign currency that has no receipts... thus the government ensures that the sale occurs at the price of the CBE and that taxes are collected without evasion," Mahmoud said.

He stressed that the only solution for the government is to cooperate with companies to fight black market traders, and work jointly with these companies in order to improve the national economy.

In the meantime, professor Fakhry al-Feqy, former advisor with IMF, said that Thursday's initial agreement to get a 12 billion U.S. dollar loan from the IMF will certainly have a positive impact on the problem of the dollar rate against the Egyptian pound.

However, he explained that the loan will resolve structural and financial imbalances, which means that "its impact on the exchange rate will be limited."

But he also said that if the loan is going to improve the economic situation in Egypt and attract more investments, the exchange rate will automatically change, and everyone will sell and buy dollars at the official rate.

"If the economy improves, investments increase and tourism revives, then U.S. dollars will be abundantly available, and consequently the rate of the U.S dollar will fall against the Egyptian pound," he said.

Governor of the CBE Tarek Amer announced on Thursday that negotiations on a 12 billion U.S. dollars loan with the IMF have succeeded, which would help reactivate the North African country's staggering economy.

Amer added that the three-year loan will be part of a 21 billion U.S. dollar Egyptian economic program.

Source : XINHUA