Squeezed by economic and political turmoil following the 25 January Revolution that toppled former president Hosni Mubarak, Egyptians are now facing a new era of hardship and austerity. The government’s adopted economic reform programme, backed by the International Monetary Fund (IMF), included the flotation of the Egyptian pound, subsidy cuts, high interest rates, and the implementation of the value-added tax (VAT).
The Central Bank of Egypt (CBE) decided to free-float the Egyptian pound on 3 November, in a move aiming to improve Egypt’s competitiveness and attractiveness to foreign direct investments, as well as giving a change to the CBE to restore Egypt’s international reserves to pre-2011 levels.
The decision was followed by a series of challenges, such as the pricing of medication disputed between the government and pharmaceutical companies, and the investors’ problem with banks demanding that they pay for the exchange rate gap before and after the flotation from letters of credit issued to cover imports.
Hence, the government’s readiness to tackle the consequences of flotation comes into question, as well as the absence of a centralised economic strategy that can achieve the main goals of the economic reform programme, which can be summarised into improving the investment climate, creating job opportunities, reviving tourism, and supporting exports.
Medicine shortage crisis
Almost all pharmaceutical companies import a large portion of their production needs in US dollars, and following the liberalisation of the pound’s rate against the dollar, the latter has increased by more than 100%, which in turn increased the production costs for these companies. These companies used to get their dollar needs directly from the CBE at the official exchange rate before the flotation.
As a response to the crisis, which indicates that it had not been taken into consideration before the flotation, the minister of health suggested imposing a 50% annual increase on 10% of the pharmaceutical companies’ products, with promises of cuts in customs, water, electricity, and gas costs, in addition to an exemption from the VAT. However, the minister’s suggestion was rejected by the companies.
Both foreign and various local companies insisted that prices be increased by 60% in order to avoid losses, especially as the official US dollar exchange rate increased by 100% in the wake of the pound’s flotation. This forced the minister to change the price increases period from one year to six months.
Later on, Minister of Health Ahmed Emad El-Din presented a proposal to the cabinet to increase the prices of 15% of domestic medicines that currently cost between EGP 1 and EGP 50 by 50%, and medicines that cost between EGP 50 and EGP 100 by 40%, while medicines that are priced at over EGP 100 by 30%.
From their side, the Pharmacists Syndicate sent an official letter to President Abdel Fattah Al-Sisi in December, calling on him to prevent any potential price increases for medication and asking for the establishment of a presidential committee which includes all the concerned parties to suggest solutions for the crisis.
Moreover, the syndicate notified Emad El-Din of their rejection of any ministerial decision that may stipulate any form of increase in the cost of medication without prior consultation with the syndicate, state-run newspaper Al-Ahram reported. This can be considered a clear warning that any price increases will be met with legal opposition from their side.
It further noted that the rapid issuance of price increases without carrying out accurate studies or consultation with specialists in the field from the syndicate’s members may be a sign that medicine companies are looking to maximise profits at the expense of citizens.
Another sign of the absence of government planning is the suggestion to increase the budget of EGP 3.5bn currently allocated to treatment at the expense of the state by EGP 5bn in preparation for the price increase.
Although the government expressed its plans to facilitate investments in Egypt, their actions following the flotation came in contradiction to the announced plans. Two major incidents in less than a month could be considered a huge setback. The first was the cancellation of Le Marché exhibition and the second was the letters of credit issued to multiple investors before the flotation.
The decision to cancel Le Marché exhibition just two days before its expected inauguration has led to outrage in Egypt’s the furniture sector. The exhibition was supposed to be held on the Cairo International Fair Grounds in December.
Le Marché is Egypt’s largest furniture and decoration exhibition. It takes place on an area of 30,000 sqm with the participation of about 250 exhibitors, with companies placing hopes on it to conclude major contracts for one year.
Tarek Nour, chairperson of the advertising agency organising the exhibition, was informed by the Interior Ministry just two days before the planned opening that the exhibition was canceled for security reasons.
Mostafa Ismail, technical adviser to Apex, the company organising Le Marché, said that security forces told the company on Tuesday morning that the exhibition was canceled, despite being informed by official executive bodies on the previous day that the exhibition will be held as scheduled.
“We were surprised on Tuesday at 10am to find security forces of the Nasr City police department evacuating halls, closing the doors, and informing us that they had received instructions to halt the exhibition,” Ismail said.
The estimated initial losses to the company are about EGP 60m after the cancellation of Le Marché, in addition to EGP 500,000 for each participating company.
According to the executive director of Meuble for French Furniture Co. Ahmed Al-Iraqi, canceling the exhibition is an unstudied decision, especially since companies were notified the Monday before that security apparatuses agreed to the exhibition, which made companies double the number of workers to finish preparing the pavilions on time.
“The state restricted imports and floated the national currency, forcing companies to produce for the local market,” Nour said. “Then, they shut down the conference where those companies sold their production.”
From his side, the head of the Chamber of Wood Working and Furniture Industries at the Federation of Egyptian Industries, Ahmed Helmy, said that the size of furniture production in Egypt amounts to EGP 10bn per year, wondering about the message the government sent to investors by cancelling the exhibition.
Letters of credit
Following the CBE’s decision to float the currency on 3 November, the Egyptian pound dropped in value from EGP 8.88 per US dollar to over EGP 18, which caused the value of the letters of credit issued to cover imports to spike.
Banks then demanded companies to pay the difference in the exchange rate before and after the flotation. The demand was refused by companies, attributing their refusal to their inability to pay.
Consequently a number of Egyptian investors took out a full-page advertisement in Egypt’s daily newspaper Al-Ahram, calling for Al-Sisi to take “emergency measures” to save Egyptian companies and industries after the recent floating of the local currency.
The advertisement, which was signed by nine investors associations, explained that Egyptian companies are at the risk of bankruptcy if they pay back bank loans at the new exchange rate, since they have already sold their products based on the old exchange rate. The Joint Stock Companies Law states that companies should declare bankruptcy if losses surpass 50%.
A drop in imports, accompanied by a shortage in basic goods and higher unemployment rates are excepted if the Egyptian companies go bankrupt, adding that various company owners and investors will face legal action due to their inability to repay bank loans.
The ad was published by various associations that represent Egypt’s prominent industrial zones, such as the 10th of Ramadan, 6th of October City, Obour, and Sadat cities investors associations.
Moreover, nine investor associations held a meeting in order to explain their situation. Mohamed Khamis Shaaban, head of the 6th of October City Investors Association, explained that the liberalisation of the foreign currency exchange market increased import costs, adding that the government should have studied the negative impacts associated with the decision before implementing it .
However, these issues get resolved. The government’s response to the consequences came as a reaction, which confirms the absence of a thoroughly studied plan, and the lack of homogeneity and collaboration between different governmental bodies, which in turn led to contradictory actions. In the case of Le Marché, all efforts by the ministries of industry and investment to reassure and attract investors were wasted by the actions of the Ministry of Interior.