EastFruit analysts highlight the high risk of major volatility in the regional market for fruits and vegetables due to the impending devaluation of the Egyptian pound against key currencies.
Background
The situation has deteriorated since a year ago. Back then, we reported on the doubling of the dollar exchange rate to the local currency, which was meant to spur the export of fruits and vegetables from Egypt. And that’s what happened – Egypt set many records of fruit and vegetable exports, as EastFruit frequently covered.
What is going on now and what are the causes of the devaluation?
Currently, the official rate of the Egyptian pound is kept stable artificially. However, the unofficial exchange rate is already more than twice as high as the official one – on the “black market” they now offer more than 70 Egyptian pounds for a dollar, while the official rate is around 31.
Due to the Houthi attacks on civilian vessels, causing a sharp drop in the traffic through the Suez Canal, Egypt, which already suffers from a shortage of foreign currency inflows, loses up to $20-25 million US dollars of foreign exchange revenue per day just from the transit fees through the canal, which amounts to $600-700 million dollars per month. Moreover, exporters, especially of fruit and vegetable products from Egypt, who delivered their products to Asia and some Middle Eastern countries, also incur significant losses.
Therefore, economists believe that Egypt will inevitably face another round of currency devaluation. This is already needed not only to secure the next installment of international loans from the IMF, but also to protect the exporters, who still somehow contribute to the country’s budget, from losing money. After all, they now have to exchange the currency they earn at the official rate, but the purchases of the essential materials and resources are already based on the real market rate.
Context and scope of the problem
Egypt is the largest exporter of fruits and vegetables in the region. Every year, Egypt earns about $3 billion US dollars of revenue from the export of fresh, dried, and frozen fruit and vegetable products. The main products that the country exports to foreign markets are oranges, potatoes, frozen strawberries, table grapes, and fresh onions. Interestingly, Egypt itself banned the export of onions, depriving itself of part of the revenue in a situation when the country could profit from it, because the EU has been experiencing a shortage of onions for the second year in a row.
Unfortunately, the Egyptian leadership continues to follow an irrational economic policy that does not encourage investment and business growth. Regular currency devaluation is a direct outcome of these processes. Each devaluation leads to a new wave of inflation, after which the government again interferes in the market, trying to manually control prices. The ban on onion exports is a vivid example of such illogical and harmful decisions for both the economy and the fruit and vegetable sector, and for the country’s image as a reliable supplier of products.
By the way, 5 years ago, Egypt’s revenue from the exports of fruits and vegetables was roughly equal to the expenditures for grain imports for the local flour milling and baking industry. Now the revenue from the exports of fruit and vegetable products already takes just a half of the expenditures for importing grains. Therefore, the situation with food security of the country, with such economic policy, continues to worsen. And this is not to mention the fact that the country, in addition to $6.5 billion dollars spent on grain imports, spends another $1.5 billion dollars on the import of vegetable oils and $2 billion dollars on importing meat and eggs.
How will the fruit and vegetable market be affected by another round of devaluation of the Egyptian pound?
If the pound devalues to its real values today, then all fruits and vegetables grown in Egypt will become much more profitable to export. For instance, according to the real, not the official rate, wholesale prices for citrus fruits are now more than twice lower than in any other country in Europe or North Africa. A similar situation applies to almost all main products.
The devaluation will have the greatest impact on the markets for citrus fruits, potatoes, strawberries, onions (if the export ban is lifted), table grapes, frozen vegetables, sweet potatoes, and dates. At the same time, while the growth of exports from Egypt may help to ease the deficit in the EU and Eastern Europe markets for potatoes, the further growth of exports of already extremely cheap frozen strawberries and table grapes may cause problems for growers in the EU.
It is worth mentioning separately that the further expansion of Egypt to the EU market of sweet potatoes will hurt farmers in the US, who are being actively pushed out by Egypt from this market. Also, the expansion of Egypt to the global market for dates may significantly lower the prices for this product, which will harm, primarily, such large exporters as Saudi Arabia, Israel, Iran, Tunisia, and Algeria.
Will the devaluation benefit the producers of vegetables and fruits in Egypt?
Experience shows that devaluation is always beneficial for exporters in the short term, however, it should be noted that the profitability of the business in the long term in this case tends to decrease rather than increase. The fact is that Egypt imports almost all elements of cultivation technologies, and the cost of imports, as clearly shown in the example with grain, grows faster than the cost of exports.
Also, a lower price for the product does not motivate exporters to improve the quality of the product, which negatively affects the reputation of the exporter and the stability of the business in the long term.
For example, Egypt now exports approximately twice as many fruits and vegetables in the volume terms as Morocco, but the revenue from exports for these countries is roughly the same.
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