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Cancellation of Cash Deposit and Wi

Cancellation of Cash Deposit and Withdrawal Caps of Foreign Currency for Individuals and Companies Importing Basic Commodities
On 8 March 2016, the Central Bank of Egypt ("CBE") has issued a decision to cancel maximum cash deposit and withdrawal limits of foreign currency for natural persons (individuals).[1] This was followed by another decision on 9 March 2016 to cancel those limits as well for juristic persons (companies) that import basic goods and commodities (namely basic food commodities and supplies; machinery, production equipment, and spare parts; intermediary goods, production inputs, and raw materials; and medicine, vaccines, and related chemicals).[2] Nonetheless, those caps have been kept for juristic persons that do not import basic goods and commodities.
Background
The CBE has recently issued a number of decisions that aim at restraining dollar circulation in the formal banking sector, mainly through setting maximum cash deposit and withdrawal limits of foreign currency at banks. The CBE justified those decisions by its objective to strictly regulate foreign currency transactions and preserve the soundness of the banking sector. Such decisions are as follows:
  1. On 4 February 2015, the CBE set maximum cash deposit and withdrawal limits of foreign currency at banks for both natural and juristic persons, so as not to exceed $10 thousand daily and $50 thousand monthly.
  2. On 26 January 2016, the CBE raised maximum cash deposit and withdrawal limits of foreign currency at banks from $50 thousand monthly to $250 thousand monthly (with no daily limits), for juristic persons importing basic goods and commodities (specified above). However, limits have been kept at $50 thousand monthly for both natural persons and juristic persons not importing basic goods and commodities. [3]
  3. On 15 February 2016, the CBE raised maximum cash deposit limits of foreign currency at banks to $1 million monthly (with no daily limits), for juristic persons working in the field of exports and have importation needs, while setting a number of conditions for this (mentioned in detail in the CBE circular pertaining to the said decision). [4]
Commentary
What the Egyptian economy witnessed in the past years with respect to restraining dollar transactions in the formal banking sector (by virtue of the decisions above), has resulted in a severe shortage of dollar liquidity within banks. On one hand, confidence in the flexibility of the formal banking sector (difficulty of depositing and withdrawing dollars) has deteriorated, resulting in the following:
  • Refraining from depositing dollar savings at the formal banking sector, and preferring to save at the informal banking sector instead (especially private savings at home).
  • Egyptians abroad have been resorting to transferring their savings into Egypt via informal channels (such as informal money exchange companies, family, friends, and acquaintances).
  • Resorting to the black (unofficial) market to obtain the required dollar amounts, yet, with higher and unreal values. This resulted in widening the gap between official and black market exchange rates.
On another hand, severe dollar shortages in the local market caused the inability of importers to meet their financial commitments. This has in turn led to shrinkage of imports needed to meet local production and consumption demand, besides the piling up of imported goods at Egyptian customs (due to difficulty of securing dollar amounts necessary for customs clearances). Consequently, prices of final goods and factors of production in the local market have increased, hence increasing costs of local production, and weakening the competitiveness of Egyptian products in foreign markets. This was especially evident as many companies have either stopped producing and exporting, or were forced to cancel or modify their contract terms with foreign companies. Additionally, importing companies had to review and reduce their profit margins. In light of the above, the CBE issued the two decisions above with the aim of uplifting constraints on dollar circulation within the formal banking sector for both individuals and companies that import basic commodities. Hence, the said decisions are expected to result in a number of positive repercussions; the most important of which are:
  1. Enhancing the liquidity of dollars at local banks[5], through restoring confidence in the flexibility of the formal banking sector. This would in turn stimulate the re-direction of dollar savings from outside the formal banking sector into the formal banking sector, and therefore increase dollar deposits at local banks. It is worth referring to the complementary measures recently undertaken in this respect, such as the issuance of the "Belady" dollar certificates for Egyptians abroad[6]; the increase of the return on dollar-denominated certificates issued for Egyptians internally (to become 4.25% for three-year certificates, and 5.25% for five-year certificates); and the declaration by both Ahli Bank and Misr Banks of the issuance of a new savings certificate with a 15% annual return and three-year maturity, in exchange for ceding dollars and buying the same amount in Egyptian pounds. All these measures aim at re-directing dollar savings into the formal banking sector.
  2. Reducing the exchange rate in the black market as a result of easing restrictions on dollar transactions in the official market. For example, withdrawing dollars from banks and selling them at the black market will lead to increased supply of dollars in the black market, hence lowering its prices.
  3. Providing necessary foreign exchange to import commodities, in addition to overcoming the problem of the accumulation of goods in Egyptian customs and ports, and eliminating the number of companies on hold for obtaining dollars. 
Despite the many positive effects expected from freeing dollar transactions in banks, as clarified above; however, such a measure must be complemented by the design and implementation of emergent plans that work on reviving more regular and sustainable dollar sources for the country. In particular, plans must be set to attract foreign direct investments; support the tourism sector; enhance exports through overcoming production impediments, reviving shut-down factories, promoting small and medium enterprises; and incentivizing the transfer of remittances from Egyptians abroad through official channels. Finally, with respect to companies that do not work in the field of importing basic goods and commodities and still face caps on deposits and withdrawals of foreign currency in banks ($50 thousand), having those restrains is a necessary measure, in the meantime, in order to restrict the random use of dollars (especially in the imports of luxurious and non-necessary products, as well as goods with local replacements). Such measure definitely complements Decree No. 25 of 2016 issued by the President of Egypt to increase custom tariffs on a wide range of products (around 600) to rates ranging between 20 and 40 percent (from 10 and 30 percent) according to the product and its classification. However, it is important to note that such caps must be temporary; to be eventually alleviated like those for individuals and companies importing basic goods. This would help avoid the negative impediments, highlighted above, that result from of restraining dollar transactions in the formal banking sector for all other companies. [1] CBE Circular, dated 8 March 2016, available through this link. [2] CBE Circular, dated 9 March 2016, available through this link. [3] CBE Circular, dated 26 January 2016, available through this link. [4] CBE Circular, dated 15 February 2016, available through this link. [5] CBE Governor recent statements refer to targeting the raise of international reserves to $25 billion by the end of 2016. [6] Has been discussed in detail in the ELU edition for the second week of March 2016.
On 8 March 2016, the Central Bank of Egypt ("CBE") has issued a decision to cancel maximum cash deposit and withdrawal limits of foreign currency for natural persons (individuals).[1] This was followed by another decision on 9 March 2016 to cancel those limits as well for juristic persons (companies) that import basic goods and commodities (namely basic food commodities and supplies; machinery, production equipment, and spare parts; intermediary goods, production inputs, and raw materials; and medicine, vaccines, and related chemicals).[2] Nonetheless, those caps have been kept for juristic persons that do not import basic goods and commodities.
Background
The CBE has recently issued a number of decisions that aim at restraining dollar circulation in the formal banking sector, mainly through setting maximum cash deposit and withdrawal limits of foreign currency at banks. The CBE justified those decisions by its objective to strictly regulate foreign currency transactions and preserve the soundness of the banking sector. Such decisions are as follows:
  1. On 4 February 2015, the CBE set maximum cash deposit and withdrawal limits of foreign currency at banks for both natural and juristic persons, so as not to exceed $10 thousand daily and $50 thousand monthly.
  2. On 26 January 2016, the CBE raised maximum cash deposit and withdrawal limits of foreign currency at banks from $50 thousand monthly to $250 thousand monthly (with no daily limits), for juristic persons importing basic goods and commodities (specified above). However, limits have been kept at $50 thousand monthly for both natural persons and juristic persons not importing basic goods and commodities. [3]
  3. On 15 February 2016, the CBE raised maximum cash deposit limits of foreign currency at banks to $1 million monthly (with no daily limits), for juristic persons working in the field of exports and have importation needs, while setting a number of conditions for this (mentioned in detail in the CBE circular pertaining to the said decision). [4]
Commentary
What the Egyptian economy witnessed in the past years with respect to restraining dollar transactions in the formal banking sector (by virtue of the decisions above), has resulted in a severe shortage of dollar liquidity within banks. On one hand, confidence in the flexibility of the formal banking sector (difficulty of depositing and withdrawing dollars) has deteriorated, resulting in the following:
  • Refraining from depositing dollar savings at the formal banking sector, and preferring to save at the informal banking sector instead (especially private savings at home).
  • Egyptians abroad have been resorting to transferring their savings into Egypt via informal channels (such as informal money exchange companies, family, friends, and acquaintances).
  • Resorting to the black (unofficial) market to obtain the required dollar amounts, yet, with higher and unreal values. This resulted in widening the gap between official and black market exchange rates.
On another hand, severe dollar shortages in the local market caused the inability of importers to meet their financial commitments. This has in turn led to shrinkage of imports needed to meet local production and consumption demand, besides the piling up of imported goods at Egyptian customs (due to difficulty of securing dollar amounts necessary for customs clearances). Consequently, prices of final goods and factors of production in the local market have increased, hence increasing costs of local production, and weakening the competitiveness of Egyptian products in foreign markets. This was especially evident as many companies have either stopped producing and exporting, or were forced to cancel or modify their contract terms with foreign companies. Additionally, importing companies had to review and reduce their profit margins. In light of the above, the CBE issued the two decisions above with the aim of uplifting constraints on dollar circulation within the formal banking sector for both individuals and companies that import basic commodities. Hence, the said decisions are expected to result in a number of positive repercussions; the most important of which are:
  1. Enhancing the liquidity of dollars at local banks[5], through restoring confidence in the flexibility of the formal banking sector. This would in turn stimulate the re-direction of dollar savings from outside the formal banking sector into the formal banking sector, and therefore increase dollar deposits at local banks. It is worth referring to the complementary measures recently undertaken in this respect, such as the issuance of the "Belady" dollar certificates for Egyptians abroad[6]; the increase of the return on dollar-denominated certificates issued for Egyptians internally (to become 4.25% for three-year certificates, and 5.25% for five-year certificates); and the declaration by both Ahli Bank and Misr Banks of the issuance of a new savings certificate with a 15% annual return and three-year maturity, in exchange for ceding dollars and buying the same amount in Egyptian pounds. All these measures aim at re-directing dollar savings into the formal banking sector.
  2. Reducing the exchange rate in the black market as a result of easing restrictions on dollar transactions in the official market. For example, withdrawing dollars from banks and selling them at the black market will lead to increased supply of dollars in the black market, hence lowering its prices.
  3. Providing necessary foreign exchange to import commodities, in addition to overcoming the problem of the accumulation of goods in Egyptian customs and ports, and eliminating the number of companies on hold for obtaining dollars. 
Despite the many positive effects expected from freeing dollar transactions in banks, as clarified above; however, such a measure must be complemented by the design and implementation of emergent plans that work on reviving more regular and sustainable dollar sources for the country. In particular, plans must be set to attract foreign direct investments; support the tourism sector; enhance exports through overcoming production impediments, reviving shut-down factories, promoting small and medium enterprises; and incentivizing the transfer of remittances from Egyptians abroad through official channels. Finally, with respect to companies that do not work in the field of importing basic goods and commodities and still face caps on deposits and withdrawals of foreign currency in banks ($50 thousand), having those restrains is a necessary measure, in the meantime, in order to restrict the random use of dollars (especially in the imports of luxurious and non-necessary products, as well as goods with local replacements). Such measure definitely complements Decree No. 25 of 2016 issued by the President of Egypt to increase custom tariffs on a wide range of products (around 600) to rates ranging between 20 and 40 percent (from 10 and 30 percent) according to the product and its classification. However, it is important to note that such caps must be temporary; to be eventually alleviated like those for individuals and companies importing basic goods. This would help avoid the negative impediments, highlighted above, that result from of restraining dollar transactions in the formal banking sector for all other companies. [1] CBE Circular, dated 8 March 2016, available through this link. [2] CBE Circular, dated 9 March 2016, available through this link. [3] CBE Circular, dated 26 January 2016, available through this link. [4] CBE Circular, dated 15 February 2016, available through this link. [5] CBE Governor recent statements refer to targeting the raise of international reserves to $25 billion by the end of 2016. [6] Has been discussed in detail in the ELU edition for the second week of March 2016.