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Would shutting down exchange companies solve the US dollar crisis? - Daily News Egypt

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Would shutting down exchange companies solve the US dollar crisis?

Opponents to the proposal point to the companies’ role in securing hard cash to non-bank customers, and claim that controlling them is easier than chasing traders on the streets


The US dollar crisis has escalated in the domestic market amid increasing speculation, leading the US dollar value to reach a record high against the national currency. In response, calls have emerged in favour of shutting down exchange companies, claiming they are the main reason behind the problem.

These calls are no longer limited to ordinary citizens ranting on the streets or even economy experts, but the words have now spread and been repeated by government and parliament officials.

Parliamentary speaker Ali Abdul Aal said during a plenary session last week that some countries posed the death penalty on informal currency market traders, adding that Egypt is at war. He expressed his concern over the exchange companies, describing them as cancer cells growing in the Egyptian economy.

Also last week, the House of Representatives voted to amend some articles of the banking law at the request of the Central Bank of Egypt (CBE) to tighten punishment on currency traders.

Meanwhile, the CBE has closed down 48 exchange companies since early this year until last week, on charges of manipulating currency prices. Among these companies, 26 were permanently closed, while 22 companies have been ordered to close for periods ranging between three months to a year.

The Egyptian market currently houses 67 registered exchange companies, in comparison to the 115 that existed at the end of December 2015.

Daily News Egypt asked bankers and experts for their opinion on the matter to answer the question and present the debate.

Those in favour of the decision say it has become necessary to give the CBE more control over the market, as exchange companies only care for their personal interests. Opponents to the proposal point to the companies’ role in securing hard cash to non-bank customers, and claim that controlling them is easier than chasing traders on the streets.

 

Mohamed Abdel Aal, a board member of both the Suez Canal Bank and the Arab Sudanese Bank (Photo Handout to DNE)
Mohamed Abdel Aal, a board member of both the Suez Canal Bank and the Arab Sudanese Bank
(Photo Handout to DNE)

Exchange companies work out of the frame of law and must be shut down until the state stabilises: senior banker

Mohamed Abdel Aal, a board member of both the Suez Canal Bank and the Arab Sudanese Bank, said that exchange companies operating in the Egyptian market work outside of the frame of the law.

He explained that ordinary exchange companies should only buy and sell small amounts of foreign currency to clients who do not deal with banks, whether Egyptians or foreign tourists. The prices, he noted, should be allocated by banks with a small profit margin.

But the situation now is the opposite, he added. “Exchange companies now set the exchange rate they see fit,” Abdel Aal explained. “They acquired the largest share of the exchange market, unlike the situation around the globe—even countries with similar conditions.”

He noted that the size of transactions on the parallel market of exchange companies amount to $50bn—something he described as unthinkable and unacceptable.

According to Abdel Aal, establishing exchange companies in the first place had some mistakes, including the lack of the Central Bank of Egypt’s (CBE) intervention in appointing managers and executives of these companies. “Those [heads of exchange companies] should have been hired under the CBE’s supervision after thorough investigations, proving them to be competent bank leaders,” he added.

He pointed out that Egypt is undergoing harsh conditions and fighting a fierce economic war, which requires exceptional measures to be taken. He called for the CBE to shut down exchange companies that work outside of the frame of law or do not abide by the CBE instructions.

Abdel Aal explained that each exchange company deals with a certain bank in Egypt, which sets its rates, where the companies settle their accounts at their corresponding bank at the end of every working day. They should then sell the surplus hard cash to banks, but that does not happen right now, according to him.

In Abdel Aal’s opinion, exchange companies must be shut down for three years, at least, until the state stabilises and obtains the necessary flow of foreign currencies to control the exchange market. “Lack of tourism fails to justify this huge number of exchange companies right now,” he pointed out.

 

general director of a private bank in Egypt Ahmed Selim (Photo Handout to DNE)
general director of a private bank in Egypt Ahmed Selim
(Photo Handout to DNE)

Currency trading should be limited to banks under current circumstances: banking expert


The current circumstances of the state should limit currency trading to banks only, said the general director of a private bank in Egypt Ahmed Selim, adding that exchange companies must be shut down, even if temporarily, until the harsh conditions pass.

He said that he urged the state to shut down exchange companies three months ago, considering the exceptional circumstances that require more than economic solutions. “Extraordinary measures must be taken,” he noted.

Moreover, Selim added that banks should deal well with the circumstances and to show some concern and fear for the country. “They [banks] should not aim to maximise their profits in the meantime, but rather see the profits they make from investing in government debt instruments as sufficient.”

He stressed that shutting down exchange companies has become necessary, but not sufficient, to solving the US dollar crisis. “We began working from the top down, but every time we remove the head of the beast, another grows,” he explained. “Now, we have to eradicate the problem at its roots by limiting the demand on the US dollar through banning consumption imports.”

Selim pointed to the past saying that President Gamal Abdel Nasser did not consider the nationalisation of companies until he was driven to that, pushed by the behaviour of profit seekers and the state’s inability to control the economy. He added that the current situation is even more vigorous than the time of Nasser. “Time is not on our side,” he noted. He urged the state to take exceptional decision, even if aggressive. “Sometimes, amputation becomes the sole solution.”

 

Ezz El-Din Hassanein, a banking and economic expert and general manager at an Arab bank in Egypt (Photo Handout to DNE)
Ezz El-Din Hassanein, a banking and economic expert and general manager at an Arab bank in Egypt
(Photo Handout to DNE)

Closing exchange companies will reduce Egypt to informal currency market: banking expert

Ezz El-Din Hassanein, a banking and economic expert and general manager at an Arab bank in Egypt, expressed his opposition to calls for the closure of exchange companies, saying that this procedure will reduce the entirety of Egypt to little more than an informal currency market.

He explained that the aim of demanding the closure of exchange companies is to move the flow of US dollars into the banking system channels, reduce imports funded by exchange companies, and facilitate the process of floating the Egyptian pound after the Central Bank of Egypt (CBE) lost control of the dollar supply. However, such measures will have further negative repercussions, he noted.

These consequences include a declining supply of US dollars, as exchange companies will resort to smuggling dollars or hiding any stashed amounts, he added. “This would make all exchange company workers leave their jobs and become informal market traders all across Egypt.”

Furthermore, Hassanein said that shutting down exchange companies will reduce the size of imports, leading many goods to disappear off the shelves, which would then drive inflation to unsafe levels, erode domestic manufacturing, push small investors out of the market, and shut down factories due to lack of dollars needed to cover their manufacturing requirements. “This would even increase unemployment and lead importers, manufacturers, and dollar seekers to foreign exchange companies to secure their requirements, especially from the Gulf countries.”

To avoid these negative impacts, Hassanein said that the CBE must have foreign exchange reserves of no less than $50bn to meet the dollar needs of the government, importers, and manufacturers.

 

director of the risk management department at an international financial institution, Zakaria Salah (Photo Handout to DNE)
director of the risk management department at an international financial institution, Zakaria Salah
(Photo Handout to DNE)

CBE will not approve closing exchange companies, stricter penalties can erode informal market: banking expert

The establishment of exchange companies dates back to the beginning of the 1990s as one of the economic reform measures taken to meet the foreign exchange market crisis at that time. The move aimed to transform the informal market for currency trading to an organised market overseen by the Central Bank of Egypt (CBE), explained the director of the risk management department at an international financial institution, Zakaria Salah.

He added that exchange companies represent important channels for foreign currency, and at the same time fall under the control and supervision of the CBE. Therefore, the CBE will not approve shutting them down, in Salah’s opinion.

He described the parliamentary approval of the CBE’s proposal to amend the banking law to stiffen punishment of illegal currency trading and regulate the foreign exchange market to counter speculation as a good move. “This will scare exchange companies and currency traders,” he added.

Salah said that the CBE will not allow the shutdown of exchange companies, explaining that to the CBE’s knowledge it is easy to control them, while shutting them down will lead them to hide and the parallel market will become an actual black market, where transactions would take place in grocery stores and houses, making supervision an unprecedented challenge.

Moreover, he added that closing companies will strengthen the informal economy, which would counteract the policies that the government has been adopting to merge the informal economy into the formal economy.

The solution, according to Salah, is penning a regulated framework for these companies, with a reinforced role of governance, to link them more to banks. He explained that all companies should adhere to supplying a specific figure of hard currency to the bank they deal with. “In a digital age, it should not be hard to set electronic data systems to enable the CBE to monitor every transaction they conduct,” he pointed out.

He added that the CBE could also allow exchange companies to practice some banking activities to increase their revenues, which would be an incentive for them not to violate the law and maintain good relations with the CBE.

 

Capital market expert Mohamed Deshnawy (Photo Handout to DNE)
Capital market expert Mohamed Deshnawy
(Photo Handout to DNE)

Exchange companies are key in the Egyptian exchange market: capital markets expert

Exchange companies are a key element in the Egyptian exchange market, said capital market expert Mohamed Deshnawy, adding that they cover places where banks do not operate, such as villages and rural areas where remittances are often sent.

Closing them will only confuse both the official and the parallel market, and will not bridge the gap between the value of the Egyptian pound and the US dollar, he noted.

“Exchange companies did not create the US dollar crisis,” Deshnawy explained. “They only made it worse.” He pointed out that the problem could be solved only through tighter measures and stricter sanctions, in addition to increased supervision over them by the Central Bank of Egypt (CBE).

He added that closure of exchange companies will not eliminate the informal market, but would rather make it deeper—transferring transactions from known markets to new unknown ones, expanding the circle of shadow deals to include not only the companies but also kiosks, grocery stores, and even public transportation.

Deshnawy continued by saying that the problem is not with those who exploit situations, but the core lies within the slow measures and the weak oversight. “If all activities that exploited a crisis were shut down, nothing would be left open in Egypt,” he added.

According to Deshnawy, exchange companies only made use of an already bad situation, which he described as usual in all countries undergoing similar situations. He pointed fingers at supervisory authorities that should counter such exploitation to fix the market, without collective punishment.

Shutting down exchange companies highlights the failure of supervisory authorities, Deshnawy added.

 

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