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Black-Market Money-Changers Thrive

Some economists say the illegal practice shows a failure of Egyptian policy. They suggest letting the pound fall to market rates.

October 13, 2002|Jasper Mortimer | Associated Press Writer

CAIRO -- Every few weeks, Hossam Fahmy commits a crime. He delivers a large number of Egyptian banknotes to a black marketeer who exchanges them for dollars.

"I wish not to buy from the black market, but sometimes you have nothing else to do," said Fahmy, a store owner selling European goods.

Thousands of merchants and factory owners resort to the black market to change money, risking 15 years in prison with hard labor. They say they have no choice because Egypt's Central Bank drastically limits the quantity of dollars that importers can legitimately purchase.

Economists say the black market represents a failure of government policy. The Central Bank has devalued the Egyptian pound seven times since mid-2000, cutting its value against the dollar by 32% cumulatively. Yet the black market survives, showing that the pound is still overvalued.

If you need foreign currency, "forget the bank," said Albert Iskandar, a retailer of European clothes who depends on the black market for 90% of the euros he needs to pay for the goods he imports.

"Egypt's monetary and foreign exchange policy is not satisfying the demand for foreign exchange, and the lack of foreign exchange constitutes a serious impediment to economic growth," the U.S. Embassy said in its most recent review of the Egyptian economy.

The Ministry of Foreign Trade and two members of the Central Bank's board of governors did not respond to repeated requests for an interview.

In Cairo, it is difficult to find an exchange bureau that will sell dollars across the counter. The quoted price for the dollar is 4.63 Egyptian pounds -- the weakest Central Bank rate -- but traders know that they can get about 5 pounds for a dollar on the black market.

The black market is believed to operate in the back rooms of exchange shops, export businesses and travel agents -- places that receive foreign currency legitimately and then resell some of it at rates higher than the Central Bank's.

The government could wipe out the black market by allowing the pound to fall to market rates. But devaluations lead to price increases, which have provoked riots in Egypt.

The government has cushioned the seven devaluations since mid-2000 by raising wages and subsidies of basic foodstuffs and medicines. In July, civil servants got a raise of 10%, about three times the inflation rate.

But the higher cost of imports has had an impact.

Dry cleaner Badawi Said said the devaluations have increased the cost of solvent by 30%. He has not raised his prices so as not to scare off customers, but he uses less solvent to clean clothing.

Carpenter Emad Hamdi, who makes furniture in a small workshop in a low-income district, said the cost of pine, imported from Scandinavia, has risen 33%. He is passing the added cost for materials on to his customers, but has tried to soften the blow by reducing what he charges for his own labor. Nevertheless, business is down 50%.

"Before, we never had time for a rest. Now, we work and then we rest," he said.

Shoppers pushing carts around a supermarket in an affluent district said they're buying in smaller quantities and opting for Egyptian cosmetics instead of French.

Taher Gargour, a Middle East analyst at HSBC bank in London, said the general slowdown highlights the flaw in the argument that letting the Egyptian pound's value float on the open market would hurt the poor.

Devaluation does make people poorer in the short term, he said.

"But what people fail to realize is that the alternative -- of having a nonworking exchange rate, as we do now -- actually causes impoverishment also," he added.

Payments are delayed, people don't receive their wages, the job market shrinks and economic growth fizzles, he said.

Egypt's economy grew by as much as 5% a year in the late 1990s, but it is estimated to have expanded only about 1% in the fiscal year that ended June 30.

Not all economists believe that Egypt should let the pound float freely.

Ahmed Galal, director of the Egyptian Center for Economic Studies, argues that speculators would drive a floating pound to unrealistically low levels.

But both Galal and Gargour believe the Central Bank could go a long way toward solving the foreign exchange problem by making more foreign currency available, devaluing the pound to the current black market rate, and widening the band within which the pound is allowed to float around the central rate -- Galal suggests a deviation of 5% to 7% instead of 3%.

Gargour said the one devaluation that came close to success occurred in August 2001. That was the only time the government dropped the pound's value to the black market rate and guaranteed that anybody who wanted to buy dollars at the official rate would get them.

The black market disappeared. But then came the attacks of Sept. 11, and the Central Bank reimposed restrictions.

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