Currency devaluation and the impacts on the construction

field in the Egyptian market

Presented to: Prof. Mona Kadry

Prepared by:

Group N4
Ali Abdelrahman Ali Azzam ID: 20121311
Islam Mohsen Abdel Hady ID: 21226161
Mohamed Ehab Makram ID: 21225652
Mohamed Hussein Elsayyad ID: 21227618
Mohamed Abdel Fattah Ahmed ID: 20121163
Contents:

 Currency devaluation and the impacts on the construction field in the Egyptian market.

 Abstract

 Introduction

 Problem Identification

 Research Objectives

 Research Questions

 Literature Review

 Primary Data

 Secondary Data

 Research Hypotheses

 Research Design

 Data Gathering

 Findings

 Conclusion

 Recommendations

 References
Abstract:

Since the Construction sector is one of the core sectors of the economy, The government invested in the
infrastructure, energy and utilities sectors in the last few years but with the devaluation against the USD
starting from almost 16 EGP equivalent to 1 USD in 2022 till reached 30.9 EGP in 2023 has affected all
the sectors, The Egyptian economy is suffering shortage of the foreign currency which led to black
market, this shortage affected the importing of the foreign material needed for the projects and led to a
significant increase reached 4 to 5 times of the prices of these materials in Egypt even large number of
local suppliers gives their quotation in USD instead of Egyptian Pound.

This research is investigating the effect of this devaluation on the construction field and how the
government and the companies behaved to adapt this devaluation focusing on the years from 2022 to
2023, The data is gathered based on Primary data from interviews and secondary data published also
surveys from different contracting companies.

This research is significance as the main economical topic in Egypt is the devaluation and there is more
than a research paper published before discussing the several devaluations the country has been
through.

Keywords: Devaluation, Black market, Construction, foreign currency.

Introduction:

The strategy of the government for development:

The government of Egypt has placed a strong emphasis on infrastructure development and construction
as key engines of urban growth and financial stability, Large-scale projects such as the construction of
new smart cities – particularly the NAC some 35 km east of Cairo – have been a priority in the sector.

They have also strengthened the position of local businesses, which are important partners in the private
sector.

The other projects cited included the $4.8bn Cairo Metro Line 3 project, which will span 17.7 km and
comprise 15 stations; the $4.5bn East Cairo-NAC monorail, which will run 54 km and include 22 stations
upon completion in 2023; and the $4.5bn, 50-km King Salman Bridge, also called the Saudi-Egypt
Causeway.

In addition to the metro line, in October 2021 the National Authority for Tunnels granted a $4.5bn rail
construction contract for the first phase of Egypt’s high-speed electric rail to a consortium including
German multinational Siemens and local firms Orascom Construction and the Arab Contractors.

The devaluation of the currency over time:

Since 2010s, ‘currency wars' became a growing Buzzword, where major central banks around the world
were tightening their policies, while others were left with no choice but to devaluate their currencies,
involve countries with a competitive export edge on one side and import-based economies on the other.

Since March 2022, Egypt has devalued the pound and hiked interest rates three times, The Egyptian
pound fell against the US dollar in March 2022 by 1%, after a 14% devaluation, standing at a range
between EGP 17.42 and EGP 18.52, compared to EGP 15.7 a day earlier, Reuters reported, citing data
from US-based Refinitiv Financial Solutions.

In November 2022 the government decided to devaluate the currency again reaching 24.5 EGP, then at
the beginning of 2023 the government was forced to float the currency reaching 30.8 EGP at the end of
May.

Egypt previously devalued the pound in 2016, when it traded at EGP 8.88 at that time, then reached its
weakest shortly after the devaluation, trading at EGP 19.62 in December 2016.

The actions of the government to deal with the devaluation in the construction field:

The government decided to stop some of the projects that has a clear dollar component, on the other
hand the government forced to modify the prices of the running projects for the portion that wasn’t
constructed yet, so the contractors can get the difference in the increase in the material prices, also a
price index is published quarterly by Central Agency for Public Mobilization and Statistics to adjust the
percentage of increase in the material price.
The devaluation’s merits and disadvantages in consideration of the construction field:

The prices of building materials in Egypt have increased sharply since the flotation of the pound, the
surge in prices could threaten projects, force contractors out of the market and property prices may rise
by 30 per cent.

Since the pound was floated by the Central Bank of Egypt the Construction Contractors submitted Claims
for extra cost due to the flotation, this means the projects will take a longer time and this will escalate
costs and put new burdens on contractors.

Some of the contractors get benefit from the modification of their contracts for the portion they already
bought with lower prices but hasn’t been constructed yet, on the other hand some of the other
companies were harmed as they have a lumpsum contract, so no compensation was applied.

Problem Identification:

The currency devaluation became the talk of the hour since 2022, the increase in the USD price by
almost the double in less than 2 years affected all the sectors in Egypt, this research focus on the impact
of the currency devaluation on the construction sector in Egypt, the devaluation resulted in increasing
the prices of all the raw material for construction even by 3 or 4 times, this research will focus of the
effect of the devaluation in the last of couple of years on the construction companies, ongoing projects,
planned projects and the government behavior.

Research Objectives:

- Identify reasons and history for the Egypt currency devaluation in the last decade focusing on
the period from 2022 to 2023.
- Identify the impact of the devaluation on the governmental vision regarding the construction
sector.
- Identify the governmental behavior with the contractors in the ongoing projects.
- Identify the type of contracts in the construction sector.
- Identify the impact of this devaluation on the construction companies in Egypt.
Research Questions:

 How the government behaved to adapt this devaluation on the running projects?

 What is the impact of the devaluation on the upcoming (planned) governmental projects?

 How the construction companies reacted to this devaluation?

 How the construction companies benefit / harmed from the devaluation?

Literature Review

There are a lot of challenges facing the construction sector in Egypt since the devaluation of the
currency, the construction cost is affected by any political or economic decisions also by any abnormal
circumstances so the risk in the contracting sector is high that’s why estimating the budget at the
beginning is very important also calculating the risks according to the surrounding circumstances and
assuming a reasonable risk factor is critical as it decided even your price is competitive or out of the
market average.

The budget estimation includes material, labor and equipment and any slight change can cost
significantly, after the last two devaluation the material cost is changed significantly even multiplied by 4
to 5 times.

This research is based on Primary data through interviews and secondary data published with reference
to these data also based on primary data collected by interviewing more than one expert in multi
companies.

Primary Data :

The objective of this is to identify and formulate the potential risk factors which relate to the impact of
devaluation on construction companies.

In addition, identifying the contrast between the industry stakeholders (owner, and contractor's).
Analyzing the variances in each side’s vision regarding the potential risk factors, probability of
occurrence, level of impact, and recommended response plans.

Performing qualitative risk analysis using interviews with industry experts and formulating their
assessment of the risk probability and Impact.
1- Company “X”

The interview is held with the tendering director regarding the study of new projects also with the
commercial and procurement director of the company regarding the running projects.

1st. Tender projects:

 What type of contract is your Project?

Lumpsum project based on specifications with items (not quantified), the project aims to deliver a
specific output of energy according to the local specification of the country.

 What are the criteria that you estimate the currency in projects?

The prices should be based on the foreign currency as 80% of the project components are exported, so
during the estimation we should consider the price in the black market as a minimum as the payment is
in local currency this is considered as a risk as we may lose the project due to the high prices but if we
considered the price in the CBE this is a complete loss for the project.

 What is the risk assessment done during studying projects?

There is a department for the risk assessment and mitigation, they study the situation of the market and
the expectation of the market for the construction period of the project, also they take figures from
previous project to decrease the risks and also to secure a pricing scheme which is reasonable in order to
submit a reasonable price.

 What is your recommendation to eliminate the risk during studying projects?

It’s recommended to link the price to the announced price of the foreign currency in the CBE as if a
devaluation occurred, they risk is minimal so they can focus of the risk of the black market only.

2nd. Running projects:

 What type of contract is your Project?

Itemized priced Bill of Quantities “BOQ” of Integrated project (Electromechanical, Infrastructure,

Medical Gases, Structure, Architecture, etc.)

 What is the impact of the devaluation in your project on wadges, materials and logistics?

Concerning the Wages, the company has to adjust the salaries for the employees to decrease the
turnover rate and secure them to complete the project, even this increase isn’t with the same rate of the
devaluation.

For the materials the prices increased significantly even some items’ costs are doubled or tripled from
the price in the BOQ bill of quantities.

The prices of the logistics of the imported material from outside increased as it is paid in foreign
currency also the internal logistics also increased but with lower rates.
  What is the methodology of claims in the project?

In order to avoid the losses, the company tends to submit a request for compensation for the items in
the BOQ through the announced price index published by the Central agency for Mobilization and
statistics.

 What is your recommendation to mitigate the risk of devaluation on the projects?

At first the company must ask for higher downpayment from the client or even ask for the down
payment for the foreign items in foreign currency, after that the company must buy the critical items
that’s price will be affected by the foreign currency at the beginning of the project, also to use the price
index in a smart way to ask for the items when their index factor became higher.

2- Company “Y”

The interview is held with the tendering director regarding the study of new projects also with the
commercial and procurement director of the company regarding the running projects.

1st. Tender projects:

 What type of contract is your Project?

Our projects are differentiating between Lump sum projects and remeasured projects based on the
client, also we have cost plus with incentive percentage projects with governmental entities. Our
projects are in Egypt and KSA.

 What are the criteria that you estimate the currency in projects?

The prices are estimated based on two factors, first all local material and wages are estimated with EGP,
second our imported material is based on the currency expected rate in the next 6 months in the black
market and added to that a contingency reserved.

 What is the risk assessment done during studying projects?

The Risk department makes a risk assessment for each project to calculate the contingency based on
each project study.

 What is your recommendation to eliminate the risk during studying projects?

There is more than one recommendation we use them with client to eliminate the risk either converting
the project to cost plus project and this is not usually accepted from the owner or that we deal with the
client to receive a down payment with foreign currency which covers our imported materials.

Also, we are working on winning bidding projects in KSA which will bring foreign currency and maintain
our works in Egypt.
3- Company “Z” Commercial and projects management consultant

The interview is held with the commercial director of the consultant and the projects director.

 What type of contract is your Projects?

We manage more than one type of project, either Lump sum projects or remeasured projects.

Also, we manage projects with EGP currency and projects with dollar currency.

 What is the impact of the devaluation in your project on wadges, materials and logistics?

As a consultant and PM, we represent the client in the projects and due to devaluation, we face a lot of
issues with contractors as most of the projects are now in the freeze phase due to the claims that are
submitted to us.

Only the dollar-based projects are running in a good way.

 What is the methodology of claims in the project?

Claims are based on FIDIC and contract clauses and submitted due to the force majeure happens in all
material, wages, and logistics inflation.

 What is the effect of the difference between the currency rate in CBE and the black market in
your claims?

This is one of the most issues that has had no decisive solution as all the contractors want to submit their
claims based on the currency rate in the black market and the owners need it with the official rates.

 What are the criteria that you estimate the currency in projects?

All future projects we study for the owners are based on the expected rate in future trading contracts
that is expected by the banks in the next 6 months also we add a margin as per each project timeline.

 What is the risk assessment done during studying projects?

The Risk department makes a risk assessment for each project and calculates the expected claims that
will be submitted by each contractor to be in mind in the projects budgeting submitted to the owners.
  What is your recommendation to mitigate the risk of devaluation on the projects?

All the issues we face are in the EGP-based projects and to mitigate the risk in the upcoming 3 years
we have more than recommendation:

1. Give the contractor the needed portion of foreign currency as down payment and this down
payment will be managed by us and the contractor and this could only happen with
multinational owners.

2. Make a deal with a foreign creditor to facilitate the currency availability.

3. Any material could be replaced from the local market to be a part as a value engineering.

4. Contractors should make a deal with their banks from the first day of the project by making
future trading contracts for either 6 months or one year which will transfer the risk little bit on
the bank.

Secondary Data:

Material cost represents a large percentage of the project cost, and as the prices are affected by the
devaluation between materials that are exported from outside Egypt and materials that affected by the
currency devaluation internally the cost of the projects is no longer match with the budget and initial
pricing.
Since a significant part of the materials are imported, the government is seeking to encourage
investment for replacement of these material however, making an investment for replacement can’t
happen over a night also some materials need huge investment and technology that can’t be afforded in
these circumstances.

The rise of the dollar led to delay in the running projects as for any change the companies take time to
see in what situation are they in and how the companies will react to the changes in the material prices,
that’s why the government decided to reconsider the running projects and prioritize them, so some of
the projects became on hold as Egypt’s Prime Minister Mostafa Madbouly has issued a number of
regulations for state bodies to rationalize public expenditure amid the ongoing global economic crisis,
including postponing new projects that need US dollars and have not yet started, also the contracts of
majority of infrastructure projects were modified to adapt the change in prices.

The government decided with the cooperation with the Central Agency for Public Mobilization and
Statistics to publish quarterly price index for the materials for the local supplies, materials and services,
this aims to compensate the contractors for the devaluation that could happen during the construction
of the project.

Although the price index was useful for the local portion it was unfair with the foreign materials due to
the shortage in the foreign currency that led to the black market, the black-market price became far
reaching double of the official price of the USD in banks, and due to this shortage, the suppliers go to the
black- market to purchase this foreign portion which is not compensated in the price index as the official
price in the banks remains the same.
For the construction companies there were significant risk in pricing the project as there is no guidance
for the pricing, some of the suppliers refused to give quotations due to instability in the prices and some
suppliers made the quotations in USD and the payment also, that led to overpricing from the contracting
companies in order to avoid the risk of price increase during the construction.

Also, after the award the construction companies tends to secure the majority of the imported material
to avoid fluctuation of prices, other companies tend to collect USD from the black market to secure their
materials.

Some companies were unable to secure their materials or even compensate the increase of the prices
which led to total loss and even closing their companies, on the other hand some of the companies get
benefited from the devaluation by who have stocks of the materials at low prices and then waited for
the price increase and get benefit from the price index modification.

Research Hypotheses

Construction
Raw Material
Period of the
Availability
Project
IV
IV

Currency Cash
Devaluation Availability
IV IV

Cost of
Construction Raw Material
Inflation Rate
Price
IV Projects
IV
DV

 H1: if the Inflation rate increases the Cost of construction increases.

 H2: if the currency devaluation increases the Cost of construction increases.

 H3: if the availability of raw material increases the Cost of construction decreases.

 H4: if the construction period increases the Cost of construction decreases.

 H5: if the cash availability increases the Cost of construction decreases.

 H6: if the raw material price increases the Cost of construction increases.
Research Design:

The purpose of this research is to investigate the impact of the of the currency devaluation on the
construction and contracting sector in Egypt, also to investigate the behavior of the government and the
companies toward this devaluation.

Data Gathering:

The data gathering is done through both primary and secondary data

Primary data:

We conducted interviews with representatives of two big companies’ “X” & “Y” in this field in Egypt

The interviews targeted two main departments Tendering and Projects to see the impact of this
devaluation on the pricing of the new projects and the running projects.

Also, a meeting with a consultant “Z” in the same field

Secondary data:

Through published data in previous research papers on relevant topics, also published price index from
the Central Agency for Public Mobilization and Statistics

Findings

After the interviews and the analysis of the data gathered through the secondary sources, also
monitoring the prices of the materials in the construction field we found a significant increase in the
material prices reached 500% in some cases.

Construction costs have shown high volatility due to the Egyptian currency devaluation and supply chain
shortages; Egypt has recently moved towards self-sufficiency in the production of major construction
materials, it remains dependent on imported raw materials and fuel, most of which are from Europe.
The following data are based on Gleeds experts and CAPMAS indices.

Values for August and September are estimated based on Gleeds view of the market since the CAPMAS
indices had not been issued at the date of publishing the report.
Conclusion

As the construction sector is an important part of our economy and based on the current economy
problem in Egypt Since the devaluation happens in 2022, this research had adopted to identify the
potential risk factors and studying their impact on this sector in the coming years.

An interview with industry experts was held to identify the potential risk factors, assess their impact, and
collect the recommended risk response plans. Moreover, surveying awareness and contrast of the
industry stakeholders regarding the risk objectives, assessment, and risk response plans.

An interview with two of the biggest real construction companies and one of the biggest commercial
and Project management consultants with their experts to provide analysis of the risks' occurrence and
impact on the projects objectives as Time, and Cost. It can be concluded that:

 All running projects with dollar-based contracts are in good stages due to the currency
availability.

 All running projects with EGP-based contract are suffering and almost freeze due to claims
negotiation.

 There is a big gap in all projects’ claims due to the gap between the CBE and the black market.

 Most of the construction companies go for cost plus projects to transfer the risk to the owner.

 Most of the construction companies are working on opening new branches in KSA as the
construction sector is in booming there, also to maintain their work in Egypt.

 In general, the respondents were consistent in deciding the risks that contractors should share it.
However, it has been found that presently many risks have unclear decided to be allocated on
 owner involvement as well the respondents possessed different perceptions pertaining to the
owner’s risks.

 Top critical risks that were carried out for further analysis. Hence, no project had succeeded in
conducting its cost and time as a plan scheduled.

 Contractors must set a side budget to overcome the exceeded scheduled cost and time.

 From the research, we find out those different project’s types’ show different risk factors.
Contractors could use the research recommendations’ outputs or could apply corrective
mitigation actions towards the identified list of risk factors using several mitigations actions
suggested in this study.

 It has been observed that risks usually affect all nongovernmental projects. Governmental
projects have been affected little bit as most of projects are cost plus and some of them have a
risk is the currency availability or project freezing.

 General it has been seen the corruption associated with recession is the most aspect of risks
affecting the Egyptian construction sector during recession periods in addition risks that related
to poorly sector participants abilities.
Recommendations

- The current situation indicated instability in the construction field, the devaluation occurred affected
the price of the material and the shortage in the foreign currency and the significant difference between
the price in the CBE and the black market indicates that a devaluation might occurs again.

- It's recommended for the government to adjust the method of the pricing index to reflect the real
value of the EGP so the companies are compensated fairly on the items in their BOQ, for the private
sector the clients must reassess their financial models to adapt the devaluation, foreign investment must
be encouraged to decrease the effect of the black market.

- For the construction companies they should ask for bigger downpayment to secure their main items at
the beginning of the project, also a suitable risk assessment must be conducted to avoid overpricing of
the items just to avoid the losing during the construction.

- Owners should supply foreign portions to the contractor if applicable, also be flexible in the claiming
process and deal with the difference in currency rates between CBE and the black market.

- Contractors need to work more on winning bidding projects in Arab countries like KSA to bring foreign
currency and help their mother branches in Egypt.
References

https://www.cbe.org.eg/

https://www.capmas.gov.eg/Pages/Publications.aspx?page_id=5107&YearID=23461

https://oxfordbusinessgroup.com/reports/egypt/2022-report/economy/sturdy-foundation-a-focus-
on-mega-projects-drives-activity-across-the-sector

https://www.zawya.com/en/economy/africa/currency-wars-the-devaluation-of-the-egyptian-pound-
gar5gbtp

https://english.ahram.org.eg/NewsContent/3/12/483955/Business/Economy/Egypt-defers-new-
projects-that-need-USD-as-part-of.aspx

https://focus.gleeds.com/egypt-construction-market-report-3q-2023/construction-market-overview

https://shehatalaw.com/2023/05/29/effects-of-currency-depreciation-on-contracts-under-the-
egyptian-law-with-special-emphasis-on-construction-contracts/

https://www.google.com/finance/quote/USD-EGP?
sa=X&ved=2ahUKEwif14T_wt2CAxWJDuwKHZi_BwYQmY0JegQIBhAr&window=5Y

 The Effect of the Rise in the Dollar Rate on the Egyptian Economy Nagwa M. El Agroudy, Fatima
A. Shafiq and Soheir Mokhtar Department of Agriculture Economics, National Research Centre,
33 El-Bohouth St., (former El- Tahrir St.,)Dokki, Giza, Egypt.

 Legal Characterization of the Challenges Faced by the Construction Industry During Covid-19 And
Devaluation of the Egyptian Pound

Riham Abuzaid rihamabuzaid@aucegypt.edu