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Al-Ahram Weekly 9 - 15 September 1999 Issue No. 446 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 9 - 15 September 1999 Issue No. 446
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Focus Culture Features Books Special Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Crunch dollar crunch
By Sherine Abdel-RazekMoney market watchers have become used to one recurring scenario in particular. It usually begins with a sluggish supply of dollars, and then escalates, quickly turning into a dollar crunch. This leads to increases in the value of the dollar at the expense of the ailing Egyptian pound. Then, amid sighs of relief, comes the happy-ending: the Central Bank of Egypt (CBE) injects the dollar-drained market with green bills and the problem is once again over.
Such relief invariably proves to be short-lived and the problem soon reemerges, a replay of the same plot line, the only difference being another increase in the exchange rate.
Last November, when the semi-fixed exchange rate escalated for the first time since the adoption of the structural reform programme, the dollar exceeded its long-preserved exchange rate of LE3.4 by two to three piastres. Then, last June, during a recurrence of the problem, the dollar reached LE3.5. Two weeks ago, it leapt again, but this time it was traded at the totally unexpected figure of LE3.7.
This last liquidity squeeze was accompanied by official assertions that the situation was under control and was concluded by the usual CBE intervention. Yet clearly, the repetition of the problem -- three times in less than a year -- indicates that the strategies adopted to deal with it work only in the short term.
While experts disagree on the depth, and thus the suggested solutions, for the problem, they are unanimous about its causes -- reduced revenue from tourism, decreasing oil prices and a consequent reduction in remittances by expatriates working in oil-producing countries and, most importantly, an increasing deficit in the trade balance. The situation is further compounded by an increase in demand for the dollar by local banks and companies seeking to repay their foreign debts.
According to economic experts, however, Egypt's high levels of foreign reserves should avert any exchange rate crisis. Though at their lowest level in 33 months, Egypt's holdings of reserves are still equivalent to 13 months of imports compared to six to seven months in most developed countries. Given, then, that Egypt has enough reserves to cover any temporary shortage in its foreign reserve supply, why the recurrent dollar shortages?
"It is the Central Bank's mismanagement of the problem. The bank stepped in too late. At the peak of the problem, it was reluctant to provide banks with their dollar requirements, as it insists on keeping its own reserves at a higher than needed level," one anonymous banker said.
Central Bank reluctance to provide reserves means the bank cannot meet its customers' demands and foreign investors are unable to transfer dividends on investments in Egypt into dollars, sending a negative signal to other potential investors.
The banker cited the case of an Egyptian company with Global Depository Receipts (GDRs) listed on the London Stock Exchange which was forced to distribute dividends on its GDRs late because of the inadequate supply of dollars.
According to the banker, the CBE treats the level of dollar reserves as a matter of national pride. The government is also committed to maintaining the eight-year-old pound-dollar peg which it considers one of the main anchors of its reform programme.
Another criticism directed at the CBE by a senior official in the foreign exchange department of the Chambers of Commerce Federation is that it is aggressive in its dealings with exchange companies. He explained that when the June dollar problem occurred, the CBE took aggressive measures against exchange companies, introducing penalties that resulted in the closure of some companies for long periods.
Members of the department, then, had no choice but to reach a compromise with government officials. They made a gentleman's agreement among them to stabilise the dollar exchange rate at LE3.47. However, high demand for the dollar tempted some exchange companies to violate the agreement. This resulted in the presence of more than one exchange rate in the market, a situation which was fully manipulated by speculators and which pushed the market even higher. This provoked the CBE, which resumed its aggressive practices against the foreign exchange companies.
There appears to be some consensus that the difference between the rates at which the CBE provides banks and exchange companies with dollars compounds this situation, opening a window not only to speculators, but also tempting some senior banking officials to make speculative gains.
Such problems, insists the anonymous banker, are usually solved by governments quickly injecting more dollars into the market or else easing their grip on national currencies, leaving them prey to the vagaries of the market. In Egypt, though, the government has resorted to imposing import regulations, which led to a local liquidity crisis, he said.
The government now obliges importers to deposit 100 per cent of the value of imports before opening a letter of credit, which has resulted in an increasing demand on liquidity.
Hossam El-Guindy, deputy general manager of Misr Iran Development Bank, on the other hand, has reservations about demands for lowering foreign reserves, arguing that the CBE has to keep high reserves because the local currency is not convertible and so cannot be easily used in settling international transactions. El-Guindy also rejects the idea of devaluing the currency. "Even if we do so, the main goal of this action, which is to increase exports, will not be fulfilled, owing to their low quality," he said.
Mohamed Maher Ali, chairman and managing director of Prime Securities, agrees, believing that any devaluation of the pound is unnecessary at the moment given its purchasing power vis-à-vis other currencies -- a main determinant of any currency's strength -- is good.
He points out, though, that devaluation of the pound would not necessarily threaten the economy. "When a currency is pegged to a stronger currency, as the pound is to the dollar, it is safe to devalue the currency within the range of difference between the inflation rates in the home countries of both currencies. Since the United State's inflation rate is higher than Egypt's by 1-1.5 per cent, we can safely devalue the pound by this rate."
The Egyptian government's reluctance to do so leaves the stage open though improvement in current account figures casts a ray of hope. According to CBE estimates, the current account deficit during the first nine months of fiscal year 1999 has retreated to $1.3 billion compared to $1.8 billion in the corresponding period last year.
Recent rises in oil prices, though, could turn out to be less beneficial than they might seem. Supply, and thus the price of oil, is after all regulated and determined by OPEC decisions, which are difficult to predict. Nor are revenues from tourism likely to pick-up as long as the sector continues to push bargain price packages.
Remittances from expatriates in the Gulf countries, too, are likely to continue their long down-hill slide, giving no extra room for optimism.
