6 - 12 December 2001
Issue No.563
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Al-Ahram Weekly Online 6 - 12 December 2001 Issue No.563 |
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Looking for the right answers
Recommendations by the Central Bank of Egypt -- and their subsequent withdrawal -- are causing confusion in the Egyptian business world. Niveen Wahish and Mona El-Fiqi investigate
Mahmoud Abul-Oyoun, governor of the Central Bank of Egypt (CBE) had a difficult week. His first decisions after coming to office early last month triggered a storm in Egypt's business and finance community.
Abul-Oyoun's recommendations to heads of Egyptian banks last week that were aimed at curbing demand for the dollar, did just the opposite. Soon after his recommendations were announced, the value of the dollar shot up to LE5 in the black market while continuing to be quoted at LE4.2745 in banks and foreign exchange bureaus. Just before these recommendations were made, the dollar had been in short supply and was traded on the black market at around LE4.5.
The most controversial of Abul- Oyoun's decisions, which were largely aimed at rationing imports and thus easing demand on foreign currency, was a three-month suspension, effective 1 December, of the use of documentary collection as a means to pay for imports. Instead, Abul-Oyoun recommended that payment of imports should be effected through letters of credit which are opened by banks on behalf of clients and for which importers have to pay 100 per cent of the value of goods they bring into the country. Documentary collections on the other hand are agreed upon directly between trading parties and allow the importer to pay for the goods in instalments. Bank fees for the latter are 0.5 per cent compared to 1.5 per cent for opening letters of credit. The recommendation was made on the basis that it would make importing more difficult and thus decrease it.
To hedge against a further deterioration of the situation, the government announced two days later that it did not intend to restrict imports and that CBE's recommendations were withdrawn. Following a meeting between Prime Minister Atef Ebeid and heads of financial, commercial and industrial federations, which was attended by the CBE governor, head of the Federation of Banks Abdel-Salam Omar announced that banks will continue to provide the needed foreign currency to the various sectors. He also announced that banks will resume providing documentary collections and that CBE's recommendations were not intended to restrict imports.
According to Khaled Hamza, chairman of the imports and customs committee of the Egyptian Businessmen's Association (EBA), the cancellation of the recommendations came in response to a memo presented by the EBA to the prime minister and the minister of foreign trade requesting that the documentary collection procedure by reinstated.
Hamza said that the CBE recommendations failed to take into account the impact on the industrial sector whose imports represent a good portion of total imports.
Businessmen's associations held several meetings to discuss the impact of the recommendations on the market. And while admitting that they were not against the reduction of imports and decreasing demand for the dollar, they had reservations about the recommendations.
Mostafa Zaki, chairman of the importers' division of the Federation of Chambers of Commerce, said that 52 per cent of total imports are financed by documentary collection. Even agents of international companies operating in Egypt, some of which are provided with credit facilities by the company producing the goods they import, have had to pay for them up front in cash, he added.
"Paying the total cost in cash before receiving the goods, is a financial burden for the importer," Zaki said. He explained that importers would be obliged to take a loan with a high interest rate to pay for their imports, suggesting that "manufacturers should have been excluded from these procedures."
According to Zaki, during fiscal year 2000/2001 18 per cent of Egyptian imports were capital goods while production inputs represented 40 per cent of total imports, which totalled $16.1 billion.
The government's move concerning the recommendations raises the matter of the extent of CBE's independence, an issue that was crucial in the government's decision to abolish the Ministry of Economy and give the CBE greater authority.
Nonetheless, the government's decision to reinstate documentary collection was welcomed by the business community, and the cost of the dollar dropped from approximately LE5 to LE4.5-LE4.7 in the black market.
Zaki attributed the leap in the cost of the dollar to the fact that importers whose shipments were about to arrive at Egyptian ports had erroneously believed that banks would not supply them with the hard currency and thus turned to forex bureaus.
But importers were not the only reason behind the sudden increase in the cost of the dollar. Amr Mohamed, a banker, blamed speculators. According to Menan Awadallah, an investment analyst, "Speculators are the only ones who benefited from the situation."
Reiterating economic observers' view, Awadallah said that while the CBE's intentions were good, the timing was off. "Documentary collection has been in use for years," Awadallah said.
Another banker, who preferred to remain anonymous, said that the government should devalue the pound first, then move to regulate the market, adding, "What is more important is that the government keep its word, and stick by its decisions."
Awadallah suggested that the government's indecision is taking a toll on foreign investors' interest in the Egyptian market. Although they view Egypt as a promising market, investors, said Awadallah, are holding back until the macro- economic situation stabilises. "We are creating problems for ourselves at a time when the political situation and the war in Afghanistan have made things worse."
She pointed out that since the value of the pound began fluctuating, foreign portfolio investors have stayed away from the Egyptian stock market. Last week, however, was an exception to this trend, when market spirits were lifted towards the end of the trading week.
The Capital Market Authority's all share index climbed 3.71 points over the week to close at 605.42 points. Monday's announcement by EAB about resuming sale negotiations with UK- based Standard Chartered Bank was positive for the market. EAB's shares rose throughout the week from LE35.18 to close at LE40.76 on Thursday. The British bank had submitted the highest bid earlier this year to buy the shares of the Bank of Alexandria and American Express Bank, but negotiations broke off in July.
Telecom stocks also fared better. Despite fears that the fluctuations in the value of the pound would affect the Egyptian Company for Mobile Services (MobiNil) stock, because of a $200 million loan, MobiNil managed to gain LE1.59 to close at LE33.65. Regional cellular operator, Orascom Telecom (OT), also increased by LE0.18 to close at LE13.11.
Whether this trend portends a brighter future for the market is unclear. "The underlying economic problems are still there. The forex problems are still there, so it's very unlikely that this is a long- term thing," Bassim Arida, head of the foreign desk at CIBC Brokerage was quoted as saying by Reuters.
"However, there are some very attractive stocks and we'd be poised for a big rally if the right measures are taken by the people in charge of the economy," he said.
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