Egypt’s new exchange

Newspaper Title: https://english.ahram.org.eg/

Newspaper Number:

Thursday - 24 September 2020

The government announced the establishment of Egypt’s first Mercantile Exchange (EME) recently, which, having capital of around LE90 million, will be jointly owned by commercial and investment banks and government entities.

Some may confuse the idea of a Mercantile Exchange with a commodity market, like those for fruit and vegetables, but in fact the new exchange is a bourse that needed the approval of the cabinet.

The newly founded EME, whose administrative building will be located in the New Cairo district of Tagamou, will operate as an electronic platform for the business-to-business trading of commodities.

The EME will function like a stock exchange, with anyone using the platform, whether buyer or seller, needing to be registered. Its role is that of a matchmaker between buyers and sellers of commodities that have large market volumes and can be stored for long periods.

Every product traded on the electronic platform will have a designated price, quantity, and grade showing its quality, Ashmawy said. Sellers, whether traders or producers, will not bring their goods to a trading floor, but they will be available for immediate offloading to buyers in certified warehouses.

The role of the EME is also to ensure that the warehouses meet certain specifications, even if it does not itself own them. They may be owned by producers or even rented, but they must meet criteria set by the EME.

Products must be in the warehouses when traded, Ashmawy said, with buyers not having to wait for them to be produced. If the products do not meet the specified quality, members will be delisted and fined, as is the practice on any stock market, he added.

The EME will start by trading commodities such as sugar, oil, gold, steel, cotton, and wheat. The government imports between seven and eight million tons of wheat annually and buys three million tons of the local produce. These amounts coulx now be traded on the EME, Ashmawy said, with a view to letting prices be determined by market forces.

“The aim of establishing a commodity exchange is to ensure the fair, clear, and transparent trading and pricing of commodities through market mechanisms. The EME is expected to contribute to reducing inflation resulting from fluctuating commodity prices, in addition to enhancing the marketability of smallholder production,” said a report prepared by the US Department of Agriculture and the Global Agricultural Information Network in February.

Ashmawy does not expect the EME to be fully operational before the second half of 2021; the infrastructure needed is huge, whether in terms of technology or the certification of warehouses.

It is expected to play a major role in cutting prices because it will do away with intermediaries, he said, pointing out that though a kg of tomatoes may cost LE0.25 at the farm gate, for example, it can end up being sold for more than LE7 in the shops because of changing hands through many intermediaries. Potential waste and the cost of transportation can also represent 20 to 50 per cent of the price.

According to Ashmawy, the EME will cut down on the middlemen, but these intermediaries will not be left out, as the Egyptian Federation of Chambers of Commerce is a 10 per cent shareholder in the new exchange.

Eliminating intermediaries will not only mean better prices for end users, but also for producers. Small farmers in Egypt may currently be selling their produce at low rates of profit to larger traders who control the market. When the EME is operational, such farmers can register themselves individually, or form a company, and become traders on their own account on the platform.

Trading through the exchange will thus do away with oligopolies, creating room for small producers and small and medium-sized enterprises. Information will be offered to market participants to inform them about the new exchange and the interest it has for them.

The idea of a commodities exchange has been on the government’s agenda for some time, but up to now it has not materialised. Today, there is “the political will” to make it happen, Ashmawy said, adding that work had been underway for over a year on it.

A proper feasibility study of the exchange was completed, and a draft law will be presented to parliament when it reconvenes for a new session. The exchange will also be supervised by a regulator: in the same way that the Egyptian Financial Supervisory Authority (EFSA) supervises the operations of the Egyptian Stock Exchange and the insurance sector, an entity will be created in the Ministry of Supply to supervise the operations of the EME.

The creation of the EME is also part of government efforts to organise internal trade, and Ashmawy, who also carries the hat of deputy minister of supply and chair of the Internal Trade Development Authority (ITDA), is not new to the job.

When he took over at the ITDA he began working on creating the infrastructure for trade that was then non-existent, he said. That infrastructure includes areas such as logistics parks, warehouses, wholesale markets, specialised markets, malls and office buildings, he said.

Today, 18 projects are being rolled out in 11 governorates, including logistics and commercial areas, and the private sector has been invited to build seven strategic warehouses across the country. The infrastructure is being provided by the state, as well as the relevant licenses, and the warehouses will be run on usufruct terms. 

The sector employs 30 per cent of the workforce and contributes 19 per cent of GDP, or some LE1.3 trillion, Ashmawy said, adding that these figures only related to the formal economy, let alone the informal economy where 90 per cent of such trade is estimated to take place.

The new EME will also create a new set of jobs, with brokers being allowed to trade on behalf of clients, just like on the regular stock exchange, he added. For the moment, only spot trading will be allowed, with no provision for futures or derivatives, though these will be introduced at a later stage.

“We are not reinventing the wheel,” Ashamwy said, in reference to the exchange’s operations. All the shareholders are already engaged in the market, and the Egyptian Stock Exchange will own around 30 per cent of the new company. Other shareholders include Misr for Central Clearing, Depository and Registry (MCDR), which will ensure the settlement of operations.

The General Authority for Supply Commodities (GASC) is also a shareholder, along with the Egyptian Holding Company for Silos and Storage. The Egyptian financial group Hermes Holding (EFG Hermes), CI Capital Holding for Financial Investments, and Beltone Financial Holding, the National Bank of Egypt, Banque Misr, the Agricultural Bank of Egypt and Misr Insurance Holding Company are also shareholders.