How manufacturers see the CBE’s decision to float + what it means for the sector’s growth prospects: After two years of successive shocks and a worsening foreign currency crunch, industry players in Egypt are broadly happy with the Central Bank of Egypt’s (CBE) decision to float the EGP last week, which promises to resolve several issues and bottlenecks manufacturers have been struggling with. The decision will go a long way in resolving problems with sourcing USD and financing exports, as well as addressing reduced production capacity, but it will also bring new challenges with higher costs of financing, according to industry players Enterprise spoke with.

In a nutshell, manufacturers expect that the float will:

  • Eliminate the parallel market and unify the FX rate;
  • Stabilize pricing mechanisms in the industrial and commercial sectors;
  • Allow factories to resume work at full capacity as production inputs are released from customs;
  • Help raise the competitiveness of Egyptian exports abroad;
  • Make raw materials and production inputs more readily available; and
  • End the USD sourcing crunch, therefore allowing factories to purchase new machinery.

REFRESHER- Last week, the CBE moved to float the EGP, leaving the exchange rate “to be determined by market forces” after hiking interest rates by 600 bps at a surprise monetary policy meeting. The decision allowed Egypt to sign a USD 8 bn program with the International Monetary Fund, and could help us secure another USD 11 bn from international partners including the World Bank, European Union, Japan, and the UK, Finance Minister Mohamed Maait said.

We’ve taken the first step, but the path forward is going to take a lot more to fully address all the issues facing local industry, Egyptian Businessmen Association (EBA) Chairman Ali Issa told Enterprise, stressing that the float was inevitable and is a critical step towards full economic reform. Moving forward, we’ll need to see several other moves to restore financial policy stability, including rationalized government spending, Issa said.

Hope abounds that things will get better, but manufacturers are also worried about the rising cost of financing as a result of the 600 bps interest rate hike, which will make doing business more expensive, Federation of Egyptian Industries member Kamal El Dessouky said. Although closing the gap between the official and parallel exchange rates is a very positive change, having a uniform interest rate of 30% across all sectors will hamper industrial investment, he said. These elevated interest rates need to either be temporary or policymakers need to introduce a financing initiative at a competitive interest rate.

Industry wants new financing initiatives: The EBA hopes to see new financing initiatives for productive industries, particularly manufacturing and agriculture, as well as service sectors including tourism, to give these sectors the chance to ramp up their productivity to cover local demand and start or boost exports. The government should also look at the specific bottlenecks facing the private sector to address their needs, Issa said. The introduction of fresh financing initiatives is currently under study, after allocations from the last program introduced last year have run out, Finance Ministry sources Enterprise spoke with said.

Banks need to supply FCY needs as quickly as possible: Manufacturers have been waiting for a long time to be able to arrange foreign currency (FCY) needs to import necessary materials and equipment, and release commodities from customs, Federation of Egyptian Industries member Mohamed El Bahey told Enterprise. It’s now critical to ensure that banks are able to arrange companies’ FCY needs in a timely manner to avoid a renewed reliance on the parallel market, he stressed.

And goods need to be released quickly, too: The Customs Authority’s speed in releasing backlogged goods from ports was on the House Industry Committee’s agenda yesterday, with committee members discussing several reports that the authority was not releasing goods quickly enough, Al Mal reports. Members of the committee called on the authority to expedite the process as much as possible, while a representative from the General Organization for Export and Import Control said that officials are moving as quickly as possible.

Certain goods and production requirements are getting priority: Customs clearance needs to be prioritized for production inputs and raw materials, with a necessary refresh of what officials qualify as “luxury goods,” El Dessouky said. Luxury goods should be at the bottom of the priority list, El Dessouky said, to ensure that critical materials get released first and that FCY resources are well-managed. Egyptian Association of Automobile Manufacturers head Khaled Saad echoed El Dessouky’s thoughts, adding that finished cars are unlikely to be among the items on the priority list for customs clearance, which means that it’s a good time to attract investments into the automotive industry and push forward on localizing the industry.

Plenty of potential will be unlocked: Egypt has a golden window to start taking over eastern markets as a major exporter amid soaring shipping costs, El Bahey said. “We already have huge offers from Iraq to contract large quantities of Egyptian iron and steel, as well as from Libya and European countries, particularly as the devalued EGP made our products more attractively priced,” El Bahey said. The future of Egypt’s economy lies in the industrial sector, he stressed, saying that we need to learn our lessons from past experiences to create an environment that allows for true manufacturing activity and attract investments, particularly as we have all the ingredients we need for industrial advancements.

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