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of 12 TABLE OF CONTENT The Central Bank of Egypt 1 About the Central Bank of Egypt 3 Policies of The Central Bank of Egypt 4 Shortage of the Foreign Currency 5 Tourism 6 Foreign Investment 7 Suez Canal 8 Trade 9 Budget Deficit 10 International Reserves and Foreign Exchange 10 Challenge of Debt Payment from Oil Companies 11 Conclusion 11

of 12 ABOUT THE CENTRAL BANK OF EGYPT The main functions and objectives of the CBE are as follows: - Recognizing price stability and guaranteeing the security of the banking system - Managing the national payments system - Managing and recording Egypt s external debt, both private and public - Overseeing the banking sector - Supervising the foreign currency and international reserves of the country - Creating and employing the banking, credit, and monetary policies - Delivering banknotes and deciding their specifications and denominations - Regulating the workings of the foreign exchange market Main positions held by Tarek Amer: - Chairman of Al Ahly Bank - President of the National Bank of Egypt - Deputy Chairman of the Egyptian Banking Institute - Managing Director of the National Bank of Egypt in London - President of Federation of Egyptian Banks, - Deputy Chairman of Arab International Bank - Deputy Chairman of Banque Misr Main positions held by Hisham Ramez: - Deputy Governor of the CBE - Senior advisor to the governor of the CBE - Managing Director of the Commercial International Bank (CIB) - Chairman of the Board of the Egyptian Banking Institute - Chairman of the Arab International Bank - Governor of the Arab Monetary Fund On October 21, 2015 Hisham Ramez submitted his resignation after nearly three years of being the governor of the CBE. President Abdel Fattah Al Sisi appointed Tarek Amer as the new governor effective on the 27th of November 2015 for a 4 year term. 2 Many of those involved in monetary policies and the exchange market believe that Tarek Amer will adjust several decisions and actions taken by Hisham Ramez. Amer is anticipated to follow a new highly flexible monetary, combating inflation while serving the economic growth. Amer vowed to reconsider the industry s banking procedures, including the facilitation of currency, in addition to reducing the duration of opening letter of credit, and not only focus on the FOREX issue. In the forthcoming period the CBE faces seven major challenges, including, rebuilding reserves, adjusting the exchange market, creating balance in domestic interest rates, controlling inflation, helping Ministry of Finance cover the budget deficit, improve banking regulations, and helping banks in the employment of their accumulated liquidity. 3 1 Bloomberg 2, 3 Daily News Egypt

of 12 POLICIES OF THE CENTRAL BANK OF EGYPT The CBE is committed to achieving price stability, appropriate rates of inflation, and maintaining confidence for sustaining high rates of economic growth and investment. The CBE placed a formal inflation-targeting framework to yield in the monetary policy, which will further enrich the transparency and predictability of the monetary policy in Egypt. In addition, the CBE meets its inflation objectives by directing short-term interest rates, keeping in sight the developments in money and credit supply, as well as other factors, which might influence the underlying rate of inflation. Monetary policy decisions are issued by the CBE s Monetary Policy Committee (MPC), which includes nine members, encompassing the Governor of the CBE, the two Deputy Governors, and six members of the Board of Directors. Decisions are taken through a set of policy procedures and instruments. The CBE uses two facilities, overnight lending and overnight deposit, as the main policy tools. The CBE is seeking to reinstate macroeconomic stability through fiscal regulation, sustained by a constricted monetary policy to contain inflation. Since 2011, Egypt has been faced with large fiscal deficits, rising public debt, and by external instability demonstrated by loss of foreign reserves. Under the governance of Hisham Ramez, the CBE has taken measures to conserve foreign reserves, which remain over 50% below their levels in 2010, as the country is struggling to recover from four years of political turmoil. Several policies have angered investors and businessmen who are calling for the CBE to leave the forex rate reach the true or fair value. Since the beginning of the year, the CBE has allowed the Egyptian pound to devalue 9.8%, from EGP 7.15 in January to 7.93 in October, making it the worst Arab performer after Algeria s dinar, yet without the controls, the devaluation would have been more aggressive. Interest Rates and Dollar Cap In August 2013, the CBE announced a cut in interest rates by 50 basis points 6 for the first time since 2009, as an effort to circulate domestic investment, but resulted in putting pressure on the currency, foreign reserves, and consumers.in 2014, the government limited bank transfers abroad to USD 100,000 a year. In 2015, in an attempt to banish the black market, deposits in foreign currency accounts were capped at USD 10,000 a day and USD 50,000 a month. Such, combined with the government s rationing of foreign currency, have greatly hurt businesses and investments. Depreciation of Egyptian Pound The Egyptian economy was caught in a recurring cycle of weak foreign investment inflows, affecting the 7 economy and economic slowdown, and foreign currency reserves, triggering countermeasures that further discourage foreign investment inflows. The Egyptian pound has devalued four times in 2015, with the CBE holding regular currency auctions to manage the supply. The CBE allowed for the devaluation of the Egyptian pound to better reflect the black market prices, in an attempt to wipe out the illicit trade. Egypt s foreign currency reserves dropped to USD 16.4 billion in September 2015, just enough to cover around three months of imports. The CBE s decision to not let the Egyptian pound fall faster comes from a fear of fuelling inflation. Inflation in Egypt has spiked after the government began cutting subsidies in 2014, but since then inflation has slowed down to 9.2% in September 2015;Egypt imports plenty of staples, which would see a spike in prices if there was a sudden depreciation of the pound, therefore leading to social unrest. 4 5 4 The Central Bank Of Egypt 5 BMI Research 6 2015 Investment Climate Statement, Bureau of Economic and Business Affairs, US Department of State 7 External Position of the Egyptian Economy, Quarterly Report, The Central Bank of Egypt

of 12 Economic Ministerial Committee Prime Minister Sherif Ismail issued a decision to create an economic ministerial committee to include the 8 Governor of the CBE, and the Minister of Finance, Tourism, Investment, Planning and Logistics, Petroleum, Foreign Trade and Industry, and International Cooperation. The committee s responsibilities include setting the general framework for the monetary and economic policies, as well as providing necessary recommendations to economic and financial issues. On a side note, the Ministry of Finance has recently approved a USD 10 billion international bond program to address the currency crisis, with the issuance of USD 1.5 billion worth of bonds expected before the end of 2015. SHORTAGE OF THE FOREIGN CURRENCY Source: Ministry of Finance The main sources of the foreign currency are as follows: Tourism Revenues Suez Canal Revenues Foreign Direct Investment Remittances Egyptian Exports 9 8 Daily News Egypt 9 Ministry of Finance

of 12 TOURISM Tourism accounts for nearly a fifth of foreign currency revenues in Egypt. Currently, tourism revenues are worth USD 7.4 billion. In the past couple of years, tourism has played a major role in Egypt s economic performance, serious measures have been made to stabilize and take control of the security situation to revive the broken industry. Security has been improving in Egypt, yet still there are a number of security challenges along borders with Gaza and Libya. With instability in security measures, the slowdown in the tourism sector will continue to impact the foreign currency revenues. Since the January 25th Revolution and the political unrest in the region, vital sources of hard currency revenue have been hit hard. Tourism has declined by 43.3% from FY2010/2011 which accounted for USD 10.6 billion, compared to the FY2014/15, tourism receipts stood at USD 7.4 billion. However, recently during FY 2014/15 tourism has witnessed an improvement, with around 10.2 million tourists, a 28.6% increase as compared to FY2013/2014, spending a total of 99.3 million nights (36% increase compared to the previous year). This comes as FY2014/2015 witnessed a significant improvement in security conditions, a clearly communicated political roadmap, and economic reform program. FY2014/2015 witnessed a shift in the type of international news coverage on Egypt, from being focused on political and security unrest towards the economy and business. However, Egypt is still slightly damaged in regards to tourism and suffers a shortage in foreign currency. It was speculated that the devaluation of the EGP could attract tourism, but travel experts believe it will not result in major improvement in tourist inflow to. 10 10 Ministry of Finance

of 12 FOREIGN DIRECT INVESTMENT In January 2015, the Monetary Policy Committee decided to cut the CBE rates to encourage investments. Consequently,FY2014/2015, investments increased by 60% as compared to FY2011/2012, to stand at EGP 238 billion. Public investments increased by 45% and private investments increased by 24.3%. Private investments accounted for 62.5% of total investments in the period from July to March. Top investment fields were extractive industries (17.8% of total investments), manufacturing 11 sector (14.8%), transportation and Suez Canal (13.7%), construction and utilities (13.2%) and social services (10%). This increase was a key point in the growth in the economy that was seen between 2014 and 2015. On the other hand, the overvaluation of the Egyptian pound as discussed earlier is depleting the supply of foreign currency, which is deterring investments. While it may simply seem that devaluing the Egyptian Pound will encourage investments, in fact, it is not enough to grant investors the confidence to finance. The CBE decision to limit the availability of dollars for both individual and companies has given priority access of foreign currency to importers of food, fuel and medicine. Since capital controls were put in place to limit the transfer of foreign funds, this has put a major burden on investors;most foreign investorsare expecting to realize and remit their profits in foreign currency. Consequently, until the availability of foreign currency is solved, it will continue to hinder investments and growth in general. 11 Egypt Economic Developments & Outlook: Can Egypt Seize The Moment?, The World Bank.

of 12 SUEZ CANAL The Suez Canal is one of the largest sources of foreign currency for Egypt. After the new development, which was inaugurated in August 2015, it was expected to increase Egypt s foreign currency reserves. According to the Suez Canal Authority, 12 Egypt s Suez Canal revenue fell 4.4% in September 2015 for the eighth consecutive month, reaching USD 448.8million, compared to USD 469.7million in September 2014. According to the CBE, the canal s revenues decreased by 0.14% during FY2015, reaching USD 5.37billion, compared to USD 5.36billion in the previous year. By the end of September, the World Trade Organization (WTO) slashed its world trade growth forecast for 13 2015 to 2.8%, down from its predicted 3.3% in April. In addition, it reduced its 2016 estimate to 3.9% from 4%. The WTO citied currency market swings, falling imports in China, unstable financial markets, falling commodity prices, and U.S. monetary policy as obscuring the outlook Given that Trade between Europe, Asia, and the United States are the key drivers of traffic through the 14 Suez Canal, and with the Transatlantic Trade and Investment Partnership (TTIP) and the Transpacific Partnership (TTP) approaching realization and expected to growing trade between the United States, European Union and Asia, experts are expecting an increase in the revenues from Suez Canal tolls, from the USD 5.3 billion projected for 2015 to USD 13.2billion in 2023, predicting an increase in total world trade in the future. 12 The Suez Canal Authority 13 The World Trade Organization 14 The Suez Canal Authority

of 12 TRADE Imports According to the Central Bank of Egypt, the trade deficit of the country in 2014/2015 amounted to USD 38,785.4 billion with the top imports owing to oil and wheat. The CBE has been trying to avoid the further devaluation of the Egyptian Pound to its fair value to prevent core inflation on basic commodities.. This policy of avoidance, as much as it is protecting the consumer by preventing sudden inflation, is hurting the economy by depleting the foreign currency reserves. It is unclear how the Central Bank of Egypt will approach the situation going forward; however, a controlled devaluation of the pound could be underway but might increase the import bill amid inflation. 15 It is unclear how Tarek Amer will approach the situation; however, a controlled devaluation of the pound could be underway but might increase the import bill amid inflation. 16 The shortage of foreign currency is a major factor at the current moment; it is inhibiting local supply of key products and long-term investment initiatives. Businesses in the different fields have been impacted and it is partially due to the bank policies which are decelerating business initiatives which are supposed to contribute to the availability of foreign currency. As discussed earlier, this shortage of foreign currency is not only putting a hold on imports but also on local manufacturing since many of the raw materials and machinery needed in the process are imported. On the other hand, according to the presidency, the state is planning to rationalize imports to decrease the burden on the currency reserves since many of these imports are not necessities and have local alternatives. Exports With regards to exports, the exports balance is USD 22.05 billion which accounts to about 38% of the total foreign currency sources in the country. The country heavily relies on importing basic goods, while exports are limited, the exports would need to be refined to increase its competitiveness in the international market. Additionally, multiples of the current amount of exports is needed to reach a positive trade balance. When it comes to exports, the country could benefit from a possibility of a devaluation of the Egyptian pound; the commodities could seem more attractive for foreign importers. In attempt and commitment to boosting exports, the Government of Egypt has been encouraging exporters 17 through the Export Subsidy Fund, aiming to increase the competitiveness of Egyptian products abroad with an aim to increase the inflow of foreign currency; the program which never halted even during the economic setback of 2012/2013. 15 The Ministry of Trade 16 Mada Masr 17 The Ministry of Trade

of 12 BUDGET DEFICIT The Government of Egypt has prepared the new budget in line with short and medium-term economic plans. The FY2015/2016 budget highlights the following macroeconomic targets: The FY2016 budget registers very ambitious targets. The Government of Egypt targets to collect EGP 622.2bn of revenues, 28% more than the expected level in FY2014/2015, and representing 22.1% of the GDP. Public expenditure is estimated to reach EGP 864.5bn, 17.4% more than FY2015 and representing 30.6% of the GDP. Deficit is expected to decrease both in absolute terms and as a percentage of GDP. Overall budget deficit is expected to stand at EGP 251.09bn, as compared to EGP 262.53bn in FY2015. This will represent 8.9% of the GDP, as compared to 10.8% in FY2014/2015. The World Bank estimates the budget deficit to reach more than 10% in FY2015/2016 18 INTERNATIONAL RESERVES Egypt has USD 46 billion of foreign currency debt, which limits the effect of weaker pound in increasing the overall debt burden. The net international reserves dropped for the third consecutive month in September to USD 16.33 billion. The drop was due to the repayment of USD 1.25 billion for a ten year bond that matured by end of September. The persistence of the struggle of tourism, the reduced Suez Canal revenues, and the underwhelming export performance will only add more pressure on Egypt s reserves in the coming period. Keeping in mind that there is another final bond payment (Qatari deposit which initially amounted USD 6 billion) worth of USD 1 billion in October 2015. Also, on the 7th of July, Egypt paid around USD 670 million debt premiums to the Paris Club, which partially led to the decrease in net international reserves, which recorded as the biggest drop in the past 30 months. The big drop is a worrying sign, especially given the unlikelihood of further Gulf assistance in light of the low oil prices 18 The Ministry of Finance

of 12 The former CBE governor Hisham Ramez believes that the external debt will increase even more due to the 19 / 20 new deposits and expects an increase in the debt service coverage ratio. CHALLENGE OF DEBT PAYMENT FROM OIL COMPANIES 22 According to the Egyptian General Petroleum Committee, as of June 2015, Egypt s debt to foreign companies stood at USD3.5billion, a 6% increase from March 2015. The Ministry of Petroleum, post 30thof June, understands the importance of restoring investor s confidence, hence putting payments as one of its top priorities. The Ministry made sure of paying USD1.5billion in December 2013, USD 1.4billion in October 2014, and USD 2.1billion in December 2014.Debt to foreign oil companies began to accumulate to billions of dollars after the 25th of January revolution, yet the government pledged to end the debt by mid-2016. The debt is the key impediment for foreign investment in the sector. CONCLUSION With the new leadership approaching, it is key to host an open dialogue with members of both the private and public sector to discuss and better understand the challenges faced by different sectors, and to voice their needs to the leadership of the CBE. PricewaterhouseCoopers in cooperation with N Gage Consulting is organizing a workshop on Monday, 23rd of November 2015 to explore the monetary policy and foreign exchange challenges that Egypt is facing. The goal of the workshop is to hold an open discussion about the economic challenges faced as a result of the slowdown in foreign investment, tourism as well as the trade deficit. These challenges have impacted the foreign currency reserves, especially with a growing import bill. With a devaluation of the Egyptian pound, inflation could eventually further impact the foreign currency reserves. The workshop aims to bring both the public and private sectors to mutually propose solutions to increase the availability of foreign currency in the country by discussing the following topics: The challenges posed by the decrease of USD liquidity and the floating of the EGP is impacting the trade 19 The Ministry of Finance 20 The Central Bank of Egypt 21 Ahram Online 22 Egypt Oil & Gas Web Portal

of 12 and investment on one end; and the budget deficit and reorganizing the foreign exchange market and propose recommendations which will help decision makers solve the issue over the short, medium and long runs.

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