CAIRO (Reuters) - Sami Khangy’s printing press has a problem: finding paper. A dollar shortage and import controls mean supply is tight. Prices are rising, profits are falling and uncertainty over the fate of Egypt’s currency is clouding investment plans.
“They want to cut imports but there are only two paper plants in the country and the quality is rubbish,” said Khangy, sipping coffee in the office at his factory west of Cairo.
“We buy imported paper from merchants. They struggle to get dollars and raise the price from one week to the next ... To fix the price now they want dollars but who has dollars?”
Few in the business community argue with Egypt’s push to preserve scarce dollars by narrowing its trade deficit, but many say a number of policies announced in recent months were imposed hastily and threaten to undermine the economic growth that Egypt needs to create jobs for its growing population.
Egypt has suffered a shortfall in foreign currency since the 2011 uprising that ousted Hosni Mubarak ushered in years of turmoil that drove off foreign investors and tourists, sources of forex it needs to finance imports of everything from wheat to consumer goods.
Foreign reserves have more than halved since 2011 to $16.53 billion in February, enough for only three months of imports.
As reserves fell sharply and emerging markets crashed last year, Egypt depreciated the pound by about 10 percent. It then strengthened the currency by 20 piastres to 7.73 per dollar in November and has held there since.
To crush a black market that flourished in the uncertainty, the central bank restricted forex movements, sapping dollar liquidity from the market and making it harder to open letters of credit and clear imports, which have piled up at ports.
In an effort to curb demand for forex it says is wasted on needless goods, it plans to cut imports by a quarter this year.
In the past three months alone, Egypt has imposed rules requiring importers to register source factories, provide import documents from foreign banks and pay 100 percent cash deposits on letters of credit. It also raised customs duties on more than 500 items, including apples and deodorant, deemed luxuries.
But manufacturers and importers alike say Egypt’s industrial base is incapable of meeting consumer demand in a market of 90 million. In the best case, they say, the policy will reduce choice and competition. In the worst, it will create shortages, inflate prices and force small businesses to close.
“The policy of import substitution was popular during the period of decolonization ... It’s one of those policies that looks good on paper but doesn’t work,” said Timothy Kaldas, a fellow at the Tahrir Institute for Middle East Policy (TIMEP).
“Lots of things are imported because there is no alternative but also because they are cheaper than domestic alternatives. There are many imports poor people depend on. Even if in theory local production could pick up the slack it would take time and in the meantime we could see a sharp reduction in employment.”
MANUFACTURERS CAN’T GET PARTS
Manufacturers say they want nothing more than to nurture industries and exports but forex controls are proving a blunt instrument, hitting the industrial base as firms big and small struggle to obtain dollars to import raw materials.
When restrictions were introduced about a year ago, companies were allowed to deposit only $50,000 a month in the bank to open letters of credit, with priority given to essential foods, medicines, fuel and raw materials. In January, the limit was raised to $250,000 for essential products only.
Manufacturers say the definition of essential is narrow, excluding coffee for instance, while they struggle to persuade banks to prioritize some components.
The problem has disrupted production at some companies, with the automotive sector among the worst hit.
GB Auto, Egypt’s largest-listed vehicle assembler which employs 10,000 people, halted production for 20 days last year because of delays clearing component imports.
“The government wants to close unnecessary imports of goods that could be substituted locally but we are one of the local producers,” said GB Auto’s chief investment officer Menatallah Sadek. “We have 50 percent local components in the cars we assemble.”
General Motors halted production for a week last month on similar grounds, pushing the central bank to allow exporters access to up to $1 million a month provided they remit a similar amount in forex within three months.
Multinationals operating in Egypt say they remain committed and are looking to the long term. Egypt is the region’s largest market while countries from Libya to Iraq are in turmoil.
The central bank has also sought to boost forex liquidity through several special operations in recent months, though pressures quickly build again.
In a televised interview last month, Central Bank Governor Tarek Amer showed scant sympathy for large carmakers, which he said made such huge profits in Egypt that they had neglected over the years to export and earn forex.
“We need them to add to the economy not just to make profit,” he said.
SMALL COMPANIES HIT HARD
The pain is felt most among small businessmen like Walid Riad, who imports and resells used printing presses and stopped trading two months ago, unable to meet new import rules or get forex.
“They have virtually banned these goods,” he said, waving a list of goods from juice to cosmetics subject to new rules.
Khangy’s medium-sized firm is managing as over half its production is exported. Payment is in dollars, but Khangy can only withdraw $30,000 a day, which he exchanges on the black market to pay his 320 staff. The rest pays for more imports.
Contracts with Egyptian clients are denominated in pounds, but the currency has depreciated by more than 10 percent on the black market in the past month alone, eroding his margins.
These are problems many family-run companies face.
Interfood imports raw coffee beans and spices. Its coffee imports fell to about 2,500 tonnes last year from upwards of 4,000 tonnes in a typical year due to the crisis.
“One day you find a decision on the dollar, then on something else, and another day on imports. You have no stability. Customs clearance used to take five or six days. Now it takes 15 or 20 days,” said sales manager Bassem Hussein.
“We raised our prices 15-30 percent due to FX risks plus import costs. Banking takes 10-15 days procedures. It is getting crazy.”
Reporting by Lin Noueihed, editing by Peter Millership
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