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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Special Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Double-bind
By Aziza Sami
It appeared to be an obvious case of role reversal when an IMF official, visiting Cairo last week, defended Egypt's fixed exchange rate regime against demands by Egyptian businesses that the pound be devalued.
"Any step to devaluate the Egyptian pound at present would be unwise given that the system has been successful since its adoption in the early nineties," economic advisor to the Executive Board of the IMF Michael Mussa told a small audience at the Egyptian Centre for Economic Studies.
The statement, which appears to fly in the face of traditional IMF and World Bank recommendations on exchange rate liberalisation, came in response to a view, expounded by the leftist-oriented economics professor Gouda Abdel-Khalek, that the pound's peg to the dollar "is exacting too high a cost on the economy."
The recession has led businesses to demand an exchange rate mechanism more responsive to market needs. Veteran banker Foad Sultan openly admonished Mussa to "advise the Egyptian government to devalue," a statement which might have caused a political furore had it been made in a more public venue.
Mussa responded that the fixed exchange rate regime has paid-off, having maintained the strength of the Egyptian pound, curbed inflation, and preserved living standards. Any sudden change would, he argued, result in negative repercussions.
Mussa's exchange rate views assume that the current system is working now, though he concedes "a more long range strategy" must take into account the possibility of future change.
His recommendation on preserving the exchange rate's status quo, which is in line with government policy, may well be a result of the harsh lessons learned from the Asian financial crisis when devaluation saw many economies spin into deep-seated recession. It could, too, be a result of increased willingness to take on board domestic political concerns -- given the backlash provoked by previous suggestions that the pound be devalued.
The fact remains, though, that preserving a fixed exchange rate cannot help alleviate the current recession. High interest rates, reduced export competitiveness, and the pressure on foreign exchange reserves, coupled with the current liquidity squeeze mean the fixed exchange rate is making it virtually impossible for companies to find funding for production or export. It is contributing to the slowdown in the economy's growth. The time, perhaps has come, when the government must start thinking about not only how to devalue, but when.
Businesses are asking that the pound be pegged to a basket of currencies. The dollar is currently stronger than the Euro by 20 to 30 per cent, but as the latter picks up, basing a basket on the euro could well activate exports, given that Europe is Egypt's main trading partner.
Egypt's once substantial foreign exchange reserves have dwindled, falling from $20 billion a year and a half ago to the current $15 billion, a decrease occasioned by the necessity of periodically injecting sums into the market to counter recurrent dollar crunches. Further, mounting domestic debt has reached LE147 billion, forcing the government to announce that it will start injecting LE2.5 billion per month starting next May in order to repay its debts.
Such injections are essentially exercises in damage limitation. Until the root causes of the recession are addressed -- lax expenditure patterns, the mismanagement of resources and uncompetitive production structures exacerbated by rigid fiscal policies -- they will remain necessary. The double bind is that while devaluation should not occur while there is a large deficit in the balance of payments, the economy cannot sustain growth if there is no clear framework on how the exchange rate will work in the future.
