“It’s an aggressive step, but it really had to be done. It’s time for our economy to grow up. It won’t be easy for the coming 6 months, but the results will be impressive,” says Ahmed Sarhan of the Egyptian export company Fruttella.
According to Sarhan, export prices are fluctuating a lot right now, due to the free floating status of the Egyptian pound. The exchange rate ranges wildly from 15.0 to 15.8 points to the dollar, depending on demand and supply. However, Sarhan thinks this will stabilize over time.
“This period is going to be tough for everybody. When we agree to a price of 15 pounds, it won’t be unusual to effectively gain 14 pounds instead. We’ll make some losses, but we’re willing to go along with this scenario. In the end, it’s going to favor us all,” says Sarhan.
Entrepreneurs like Sarhan think that Egypt will benefit from a higher rate of export, at the cost of reduced import. While many import companies, right now, will be motivated to shift to export as well, most companies lack the financial means needed to invest in such a change of industry. According to Sarhan, only 20% to 30% of the current import companies would be able to make the shift.
Along with the devaluation, Egyptian banks have also raised their interest to encourage civilians to deposit money for extended periods of time. Anyone willing to put their financial means in the bank for up to two to three years, receives an interest rate of 20%. However, the downside to this is that is has become more expensive to take out loans, which in turn will hold back both local and foreign investments.
“The current interest policy is a double-edged sword. I don´t think the banks will keep up this scheme for long, but they need to provide an incentive for people to trade dollars for Egyptian pounds,” adds Sarhan.
The Egyptian system for government revenue isn’t really based on taxes, but rather on subsidies. In order to finance the current changes in Egypt’s financial climate, the government has taken away any subsidies for fuel and applied more subsidies to support the poor, by way of social welfare. However, Sarhan thinks that, at least for the short term, Egypt’s poor will still suffer some of the consequences. “It’s like a painful surgery that will heal over time” concludes Ahmed Sarhan.
Sherif El Naggary of the Fresh Fruit Company agrees. “Though imports will be difficult due to higher prices, this will definitely help the exports. The export of citrus will start in December. The only factor we need to take into account is what prices need to be set. The value of the Egyptian pound may change significantly during the season. Our customers in Russia and Europe order by consignment, which means that by the end of the season, they’ll pay an amount that was negotiated at the beginning. We do not know yet what the exchange rate is going to be in May or June. If it goes down, it will lead to terrible losses for exporters. If the dollar goes up, things will be fine.
However, all things considered, the devaluation is a positive development for exporters. El Naggary argues that a low exchange rate leads to cheaper prices that are more attractive for foreign customers. It also stimulates foreign investments.
“Competitive prices and attracting foreign investments is how you strengthen an economy. Demand from abroad will increase, though we’ll also always be dependent on the seasons.
While El Naggary acknowledges that, from an individual perspective, the interest rate of the Central Bank is very attractive, he also sees it as a somewhat negative influence for trade.
“Loans will be more expensive. But we expect that, within three to six months, the interest rates will go down as banks get hold of sufficient amounts of financial means. The loan of the IMF will also help our economy. All we need is patience to see how this works out,” concludes El Naggary.
Additional source: CNN - http://money.cnn.com/2016/11/03/news/economy/egypt-pound-devaluation-bailout/
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Sherif El Naggary
Fresh Fruit Co. Egypt Ltd.
Author: Peter Duivenvoorde / Yzza Ibrahim