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.
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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 programme 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 organised 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.”
Facing dwindling foreign reserves and a gaping trade deficit, Egypt had rationed its dollar supplies in the past few years. As banks prioritised 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 liberalising 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 materialise. 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.”