Egyp­tian im­porters nurs­ing losses want a govt bailout

Traders lose heav­ily af­ter cur­rency float

Kuwait Times - - BUSINESS -

Hud­dled in the Radis­son Blu ho­tel on the out­skirts of Cairo last week, some of Egypt’s top wheat traders talked dam­age con­trol: they had lost more than $1 bil­lion since the coun­try floated its cur­rency and now they wanted to be bailed out. Egypt took mar­kets by sur­prise on Nov 3 when it aban­doned its peg to the US dol­lar in a move aimed at at­tract­ing cap­i­tal in­flows and end­ing a cur­rency black mar­ket that had all-but dis­placed the banks.

The flota­tion helped the cash-strapped govern­ment clinch a $12 bil­lion IMF loan pro­gram it hopes will re­vive growth ham­pered by po­lit­i­cal un­cer­tainty since a 2011 up­ris­ing ended Hosni Mubarak’s 30-year rule. But it also cre­ated huge losses for some im­porters of sta­ples like wheat and medicine who opened credit lines when the pound was pegged but did not set­tle be­fore the float. The pound has halved in value against the dol­lar since Nov. 3, to trade at about 17.60 to the dol­lar on Thurs­day.

Im­porters of es­sen­tial goods like wheat - Egypt is the world’s big­gest wheat im­porter - and medicine were on a pri­or­ity list that gave them ac­cess to scarce dol­lars at the of­fi­cial rate be­fore the float. Alaa Ezz, sec­re­tary-gen­eral of the Fed­er­a­tion of Egyp­tian Cham­bers of Com­merce, es­ti­mates that these crit­i­cal in­dus­tries now owe $6-7 bil­lion as a re­sult of for­eign ex­change losses.

“The banks in the past few months were not mak­ing for­eign cur­rency avail­able ex­cept for strate­gic com­modi­ties, so this is the ma­jor­ity of the back­log,” he said. Phar­ma­ceu­ti­cal com­pa­nies said the losses and frozen credit lines had ex­ac­er­bated a grow­ing short­age of medicines since the sud­den plunge in the pound’s value ren­dered price-con­trolled medicines un­prof­itable to make or im­port.

“This is a very big prob­lem and is be­ing looked at as it does not only in­volve food prod­ucts,” said a source at the com­pany that or­ga­nized the cri­sis meet­ing of wheat traders.

Rep­re­sen­ta­tives of about 50 grains com­pa­nies that at­tended last week’s meet­ing at the Radis­son said they were draft­ing a let­ter to Prime Min­is­ter Sherif Is­mail, a plea to help cover losses they say are tied to dol­lar re­quests they made months be­fore the float but that were held up by banks.

“We have to ask high to see what they will do,” said He­sham Soli­man, pres­i­dent of Med Star for Trad­ing, which made losses due to the flota­tion. Soli­man did not at­tend the cri­sis meet­ing but is in close con­tact with traders who did. “This should be solved be­fore Dec. 31 be­cause the banks have to do their bal­ance sheets... they have to de­cide how they record this on the bal­ance sheet and they are run­ning out of time.”

LIT­TLE SYM­PA­THY

Fac­ing dwin­dling for­eign re­serves and a gap­ing trade deficit, Egypt had ra­tioned its dol­lar sup­plies in the past few years. As banks pri­or­i­tized es­sen­tial goods, im­porters of non-es­sen­tial items were forced to re­sort to the black mar­ket for dol­lars, where they paid much higher rates.

Many im­porters of es­sen­tials had ex­e­cuted deals on credit in the months be­fore the float, re­ceiv­ing ship­ments while dol­lar trans­ac­tions were in process at banks at the old of­fi­cial rate. This ex­posed them to risks in the event of a cur­rency de­val­u­a­tion. But many were will­ing to shoul­der the risks, be­liev­ing the cen­tral bank would pro­vide dol­lars to cover im­port back­logs if it ad­justed the ex­change rate, just as it did when it last de­val­ued the pound in March.

When the cen­tral bank an­nounced it was lib­er­al­iz­ing the ex­change rate al­to­gether, how­ever, it auc­tioned just $100 mil­lion at about 14 to the dol­lar. The multi-bil­lion-dol­lar in­jec­tion many ex­pected has yet to ma­te­ri­al­ize. The cen­tral bank did not re­spond to re­quests for comment.

Bank­ing sources con­firmed that some im­porters were fac­ing ma­jor for­eign ex­change losses but de­clined to give de­tails. Im­porters said that some banks had frozen their credit lines un­til the back­logs were cov­ered, cre­at­ing a cash­flow cri­sis.

Some traders are still hold­ing out hope of a cen­tral bank dol­lar in­jec­tion at a rate be­tween the old peg of 8.8 pounds to the dol­lar and the new mar­ket price, to cover some of their losses. Ezz said this was un­likely at a time of sweep­ing govern­ment aus­ter­ity, in­clud­ing tax in­creases and sub­sidy cuts, though his trade group was push­ing for banks to un­freeze credit lines. “Po­lit­i­cally, it’s in­sen­si­tive to work on any­thing like that at the mo­ment,” he said. “But we need these com­pa­nies to keep op­er­at­ing so their prof­its can start to ab­sorb the losses.”

Other traders have lit­tle sym­pa­thy for the predica­ment of those caught out by the float. “They be­lieved that even if there was a flota­tion, there would be an auc­tion to cover them at the lower rates. They were very greedy,” said one trader who was not ex­posed. “Let them go bank­rupt.” — Reuters

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