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By Gazbeya El-Hamamsy

As anyone who has failed to empty his or her pockets at the end of the day knows, Egyptian banknotes will not survive a trip through the wash. In an effort to increase the availability of small change, the government is promising to make us all hear our pocket change jingling, instead of tearing, by next summer.

Many problems plague Egyptian currency in circulation, including the quality and abuse of banknotes. In keeping with the trend in many Western countries to turn smaller denomination bills into coins, the Ministry of Finance and the Central Bank of Egypt (CBE) have held lengthy talks over the last year to hammer out an agreement on issuing brand new LE 1 and 50 piastre coins, scheduled to be released into circulation sometime in the middle of next year.

Although officials at the Central Bank of Egypt, which is responsible for issuing banknotes and coins, declined to say when, exactly, the coins may be released, CBE Deputy Governor Fathy Afifi, whose mandate includes the printing of banknotes, predicts they will be ready for use by next June.

“We’re still going through the logistics of assembling material and then the minting process can begin,” says Ahmed Saad, a senior official at the CBE’s mint. “Starting in January, we will be able to get a more accurate date of release for the new coins and so we don’t want to cause a stir in the market over nothing [at this time].”

Officials are reluctant to give specifics about the weight, materials to be used or design of the coins, but Saad says the LE 1 coin will be engraved with a picture of King Tutankhamen on one side, while the inscription (of date of issuance and coin value) — which he says will be in Arabic only — will be on the other side. The design of the 50 piastre coin will feature Queen Cleopatra.

The mint and the Ministry of Finance are presently waiting for proposals in response to their international tender for both material composition (coins are often made of a combination of chrome, copper and aluminum) and pricing. What they do know, however, is that while the material will be imported (likely from Russia and other European countries), the minting will take place in Egypt.

Paper for Egyptian banknotes is currently imported from the UK and France.

Afifi denies that the new coins come as a reaction to an imbalance in the ratio of currency denominations in the market. There is no surplus, he says, of LE 100 or LE 50 banknotes, saying that if “you want change [in banknotes], we’ll get you change.” (See chart for the change in distribution pattern in the past five years.)

He adds that as market demand changes, the number and kind of bills issued fluctuates in response.

Bank notes have a brief lifecycle due to the poor quality paper used, rapid circulation, and the public’s careless handling. According to Afifi, small currencies receive the roughest treatment.

“We are being forced to turn them [LE 1 and 50 piastre banknotes] into coins in order to deal with this problem. It’s to enable these currencies to handle more usage and live longer in the market,” he says. “People are less careful with the smaller banknotes than they are with, say, the bigger LE 50 and LE 100 notes, simply because those are more valuable and so people treat them with more care.”

After the introduction of the new coins, the Ministry of Finance and the CBE will take old, unfit banknotes out of circulation to be shredded or burned.

“We are continuing, however, with the production of banknotes [including those in small denominations] for a while to come — until the market accepts the idea of coins — at which point we will switch to coins,” explains Afifi. “This will happen gradually by taking the old notes out and putting the new coins in, and so on.”

Philip Diehl, senior vice-president and partner at Fleishman-Hillard Cairo, the firm responsible for aiding the General Authority for Free Zones and Investment in promoting Egypt as an investment destination, is also a former director of the US mint under President Clinton.

“One crucial way to break people from using bills is to remove bills from the market and, in a sense, they will have to be forced into it,” Diehl says. “Also it’s very important to educate the public about the new coins.”

It will probably not be an easy task to persuade paper-oriented Egyptians to let go of their familiar currency for the more burdensome, heavy coins. Diehl says it’s a necessary step as coins have a circulation life of 20 to 25 years, as opposed to the short-lived six-to-12-month life of a banknote.

Although Afifi could not disclose how much it might cost to mint a LE 1 coin, he says it will be more than the coin’s face value, but that it’s rendered worthwhile because of its durability in the market, compared to the cheaper-to-make banknote. He declined to give the specific costs of producing bills in comparison to coins.

In the US, producing a coin costs three times more than producing a bill. “Dollar bills wear out fast: within 16 to 18 months. It costs four cents to produce a bill, while producing a coin costs 12 cents, but with coins, the return on investment is much better because with the bill you will have to keep repeating that cost,” says Diehl.

According to Diehl, the advantages of coins, however, extend well beyond durability: They also facilitate commerce. Take vending machines: The mechanisms that allow them to accept bills are costly, and with the bedraggled state of pound notes, vending machines reject the pounds people try to feed them so often that the machines are virtually unheard of in Egypt. Mass transit systems or any business that requires coins with an automated acceptance machine will benefit from their introduction, and affect the pricing of products, which to some extent is influenced by the relative availability of different denominations.

In light of these changes, the Ministry of Finance is also rethinking the circulation of five and 10 piastre banknotes. Inflation has made them of relatively little use, but they remain expensive to make. While those still in circulation will remain valid, five and 10 piastre notes are no longer being printed. The 25-piastre bill will still be in circulation alongside the 25-piastre coins and follow a similar process of coin integration and gradual banknote retrieval.

According to Afifi, within the coming six months, the mint will also start using more durable, imported paper for banknotes. The CBE’s board has already approved the move. After an open tender, paper will likely be imported from the US, the UK, France or Russia.

“I can’t predict whether Egypt will be importing its banknote paper from the US or not, but the cost of US paper compared with other sources like Western Europe and Australia is relatively low because the paper we use in the US is not as technologically sophisticated as paper in many Western countries, and with huge volumes purchased, we could be creating economies of scale,” says Diehl. bt