Dollar drought irks Egyptian firms

By James Whittington BBC World Service Africa business editor in Cairo

A shortage of hard currency is undermining the Egyptian government's efforts to boost the country's exporting and tourism industries by allowing the pound to be devalued.

There is growing frustration in the business community at how difficult it is to buy US dollars, and this has contributed to the re-emergence of an active black market in foreign currency.

The government has responded to the shortage of dollars with a new law which demands all exporters hand over 75% of their foreign exchange earnings to the country's banks.

The aim of the law has been to make sure the hard currency surrendered by firms is made available to the rest of the market.

The law has caused an uproar in the business community, and bankers in Cairo say it has increased the level of capital flight out of Egypt.

Weak pound

In January this year, the government decided to let the Egyptian pound float freely, allowing the exchange rate to be determined by the market rather than the Central Bank of Egypt.

This led to an instant fall of over 20% in the pound's value against the US dollar.

The slide came hot on the heels of a gradual weaking of the currency over the past few years.

Intervention

Critics blame the government for the subsequent hard currency shortage and insist it has "messed up".

"There were many arrangements required after the implementation which they didn't take seriously," said one of the most vocal supporters of economic reforms within the ruling National Democratic Party, Mahmoud Mohieldin.

"Like having the stomach to absorb increases in the value of the dollar and the euro vis a vis the Egyptian pound."

The government rejects such criticism.

"Things have to stabilise. You cannot just leave everything free from day one," said Finance Minister Medhat Hassanein.

Mr Hassanein blames the shortage of foreign exchange on speculators who are hoarding dollars, and rejects claims that the government is forcing banks and official money changers to fix the pound's exchange rate.

Defending the new Surrender Law, he added:

"I think all these measures are temporary by nature and once the market stabilises... all these measures have to be looked at and in some cases eliminated."

Undervalued

The finance minister is not the only one who hopes the situation will stabilise over the next few months.

"If anything, the pound is hugely undervalued if you look at the fundamentals of Egypt's economy," said one banker who said he was frustrated about the market's lack of confidence in the country's currency.

"But everything the government touches on the economic front seems to disintegrate."