On 7 November 2017, Thierry Senechal, CEO of Finance for Impact, spoke at the GTR Egypt Trade & Finance Conference 2017. He presented findings from the Trade Finance Assessments done in Egypt, Jordan, Morocco and Tunisia on behalf of EBRD. Over the past year, Finance for Impact explored many challenges impacting the trade finance markets in the region, including economic uncertainties, lack of access to finance, non-tariff barriers, affordability of SME finance, information asymmetries, etc.
At the conference, the issue of the 2016 devaluation (flotation of the Egyptian Pound against foreign currencies) seemed high on the agenda, in particular in terms of possible impacts on trade competitiveness. From the remarks made by several speakers, the impacts of the devaluation can be summarized as follows:
Trade deficit has decreased (30% in one year)
Exports have increased (due to the attractiveness of the pricing for some products under the devaluation)
Remittances and FDIs have increased
Banks has cleared their backlogs for capital repatriation for foreign companies
Foreign reserve has significantly increased
Use of black market has been curbed
Discount and lending rates are still around 19%, one year after the start of the flotation
Treasury bill rate is around 22%, maintaining incentives for banks to invest in this instrument (and not on real investment)
Inflation is currently above 30%
Even if banks are very liquid, the high cost of funding is hurting the development of the private sector as long-term investments are postponed (Also the effects of the Central Bank’s incentive scheme for commercial banks to lend to SMEs at the 5% rate has to be seen in the future).
More specifically, Thierry Senechal indicated that there is a persistent trade finance gap in Egypt, which hurts SMEs the most, and thus has negative knock-on effects on growth. Despite the effects of the devaluation, the size of the trade deficit remains worrisome (about USD35 billion in 2016). Part of the growing trade deficit is due to external factors that are beyond the government’s control, such as the price spikes of food on the international markets. Part of the deficit is also structural, resulting from the inability of Egyptian SMEs to compete on foreign markets. Truly, the devaluation is giving opportunities to Egyptian exporters to tap into new markets on the short-run, as local products are now more competitive on price. However, on the long-run, the devaluation cannot be seen as panacea for export diversification. A robust export diversification strategy is required to significantly increase exports, in particular towards Africa.
Finance for Impact is scheduled to complete the EBRD Trade Finance Assessments in the region by the end of the year. More information will be provided about this project soon.