News Analysis: Egypt's crackdown on dollar black market cripples importers

Egypt's central bank has recently begun a crackdown on the currency black market, yet financial experts believed that such a campaign has caused troubles for importers due to the lack of U.S. dollars from the banking sector.

The central bank has now barred monthly dollar deposits at 50,000, while at the same time allowed the Egyptian pound to depreciate by over six percent.

These moves have helped enervate the currency black market. However, investors and importers still want more to be done.

"The CBE (central bank of Egypt) move is normal as any central bank wouldn't like to have two prices for the dollar in the trading market, but it came at a time when there is shortage of the dollars provided by the bank as alternative," said Mohamed Farid, head of Dcode Economic and Financial Consulting Company and former adviser to finance minister.

The financial expert explained that the CBE might have limited the dollar trade outside the banking sector, but the issue is that the dollar resources are too limited to make up for the shortage.

Egypt has four main sources of foreign currency including direct investments, tourism earnings, revenues of the Suez Canal and the remittances coming from overseas Egyptians.

"The increase of the annual revenues of the Suez Canal from five billion to 5.5 billion dollars cannot cover the gap between Egypt's imports and exports, which has mounted to 33 billion dollars," Farid told Xinhua, noting that Egypt used to cover the shortage through tourism revenues and expatriates' remittances that have declined since the 2011 uprising.

Some experts warn that although the CBE move to limit the black market is a step in the right direction, the shortage of foreign currency may lead to further crises including price hikes.

"Dollar shortage versus dollar demand will cripple importers and decrease the amount of products displayed in the market, which in turn will raise their prices based on the offer and demand principle," said Rashad Abdo, economics professor at Cairo University and also head of the Egyptian Forum for Economic and Strategic Studies.

Abdo warned that the current situation undermines potential foreign investment inflows, while the revival of the black market is still possible if the government does not provide enough dollars for investors.

"If an Egyptian importer fails to transfer dollars to exporters abroad due to the new bank regulations, it may disrepute Egyptian businessmen and eventually lead to international arbitration," Abdo told Xinhua.

Right before the 2011 uprising, Egypt had 36 billion dollars of foreign currency reserves at the central bank, but the country lost about 20 billion dollars over the past four years of political turmoil and instability.

Egypt has recently received six billion dollars of aid sent this month by supporting oil-rich Gulf states to assist the country's ailing economy, raising the foreign currency reserves to exceed 20 billion dollars, yet the government hasn't revealed how this amount will be used.

"The CBE is like fighting with a wooden sword, as it cracks down on currency black market yet the alternatives it provides to importers and businessmen are too limited to cover their demands," said Islam Omar, trading manager of Cairo-based Al-Helal Al-Saudi Brokerage Company.

Omar added the six billion dollars Egypt got from Gulf states may help refresh the market for a short while, but the main issue will remain unresolved because the dollar resources are limited and the export sector is down.

"The sea of dollar demand is met by limited resources, which leads importers and businessmen to try to bypass the regulations and refer to the black market," Omar told Xinhua, noting that the currency black market hasn't been 100 percent eliminated despite the efforts.

In March, Egypt held a high-level worldwide economic conference and made investment deals worth tens of billions of dollars, and over 12 billion dollars of them are promised by Gulf states alone.

"Perhaps after Egypt completes the huge projects of the Suez Canal extension and the development of its corridor, the foreign currency inflows may make a difference," said the expert, noting that these long-term projects still cannot resolve the dollar shortage anytime soon. Endit