- Governor says measures are `quick fix' to balance of payments
- Amer says central bank has restored domestic market confidence
Egypt’s central bank Governor Tarek Amer said rules to curb what he described as unnecessary imports may save about $20 billion this year, helping to ease a foreign-exchange squeeze threatening the nation’s economic recovery.
“The largest demand for foreign exchange comes from imports, so these measures are a quick fix to improve the balance of payments," Amer said in an interview with Bloomberg News in his Cairo office on Tuesday, his first with an international news organization since he assumed the position in November. “Egypt has been flooded with cheap, low-quality goods and we are trying to regulate this market.”
Authorities have tightened rules to finance the imports of goods deemed non-essential and have asked importers to register their foreign suppliers with the government. Egypt imported $61 billion worth of goods in the fiscal year that ended June 30, according to official data, almost three times the value of its exports.
Amer took charge amid a national debate on currency policy, with investors criticizing his predecessor over measures that included restrictions on dollar cash deposits at banks to crack down on black market trading. Policy makers have since taken steps to bolster confidence in the local currency as they attempt to counter speculation of an imminent devaluation.
“You can’t continue to finance the deficit and defend the pound in a completely open economy -- you either let the pound depreciate or close up parts of the economy," said Ziad Waleed, an economist at Cairo-based investment bank Beltone Financial. “It seems that the central bank has decided to do the latter through import controls."
In November, the central bank unexpectedly appreciated the pound, which is subject to a managed float, by 2.6 percent. It then paid back the arrears owed to foreign stock and bond investors.
The two biggest state-owned banks raised interest rates on three-year deposits by 2 percentage points, attracting more than 100 billion pounds ($12.8 billion), local media reported.
The focus on imports is a “realistic approach by policy makers in light of poor current-account dynamics,” according to Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes, Egypt’s biggest investment bank. “Even in the case of a potential devaluation, the expected increase in portfolio inflows is not likely to meet the expected bounce in imports.”
Foreign-currency reserves, while down by more than 50 percent since the 2011 uprising that ousted President Hosni Mubarak, have stabilized in the last four months at more than $16 billion. The central bank raised interest rates by 50 basis points on Dec. 24 and said it seeks, in coordination with the government, to “avoid double-digit inflation rates over the medium term.”
“In a matter of a few months, we have succeeded in restoring confidence in the domestic market," said Amer, former chairman of Egypt’s largest commercial bank. He didn’t disclose how he managed to pay investors back without affecting reserves.
The benchmark EGX 30 Index for stocks has lost 3.5 percent since Amer officially took office, compared with a 13 percent decline in the MSCI Emerging Markets Index.
Not everybody shares his optimism. Economists see devaluation necessary to attract more foreign investment. Egypt’s non-oil business activity, while improving in December, still shows signs of contraction, according to the Emirates NBD Purchasing Managers Index. The measure contracted in 9 out of 12 months last year.
Allowing the currency to depreciate is conditional on building a “liquidity shield" that enables the central bank to “to manage the process and instate stability," said Abu Basha of EFG-Hermes. Devaluation is unlikely to be imminent, he said.
Egypt’s economic growth will likely slow to 3.5 percent this year from 4.2 percent in 2015, according to a Bloomberg survey of 11 economists. Amer said the economy was performing better than official numbers suggested.
“Just look at the size of real estate construction that has taken place throughout the past five years," he said. “Egypt has big potential and is a very attractive market.”
The governor, a former Citigroup Inc. banker, said that the push to coordinate economic policy with the government was an indication to Egypt’s determination to enact reforms. The main avenue for the coordination is a council that includes Amer, top cabinet ministers as well as outside experts such as Mohamed El-Erian, the former chief executive office of Pacific Investment Management Co. The panel has met twice in the past month.
“We are, for the first time, setting a comprehensive economic vision for Egypt through the coordination council," Amer said.