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Al-Ahram Weekly 20 - 26 July 2000 Issue No. 491 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 20 - 26 July 2000 Issue No. 491
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Balancing act
By Aziza Sami
Ismail Hassan, the Central Bank of Egypt's governor, recently announced that the CBE would consider diversifying Egypt's foreign currency reserves into a basket of currencies rather than maintaining them strictly in dollars. The step, which indicates a shift in monetary policy aimed at diversifying risks, begs the question whether the government might soon consider a more flexible exchange rate regime wherein the pound will be "gently" devalued.
There is a market consensus that the pound is overvalued, under the current fixed exchange rate, by 10 to 15 per cent. But it must also be conceded that the government has shown greater flexibility recently by allowing exchange bureaus to transact sales publicly at PT350 as demand for the dollar has risen. The government, therefore, is implicitly accepting the pound's slight devaluation in response to market needs rather than imposing the unrealistically low rates that have driven exchange bureaus to resort consistently to under-the-table transactions.
At a time when the economy is becoming increasingly open to global trade, maintaining a fixed exchange rate will become more difficult. Pressure will be exerted on the pound if its peg to the dollar continues, and the latter continues to rise against the euro. The pound, in fact, has already risen against the euro by the same 25 to 35 per cent as the dollar. Businesses, in consequence, are becoming extremely vocal in their demand that the peg to the dollar be broken and that the pound be tied to a basket of currencies. This shift, they argue, is crucial if they are to export to European markets successfully -- an issue that will grow even more pressing when the partnership agreement with the EU is implemented .
Naturally, the local market has also suffered the vagaries of the artificially supported exchange rate, leading to criticism that the pound's "strength" cannot depend interminably on political and administrative interventions to support it.
Former Minister of International Cooperation Waguih Shindi aptly expressed the situation during a meeting with Michael Mussa, the IMF's senior economic counsellor, when the latter was in Cairo at the beginning of this year.
"In the mid-'70s," said Shindi, "the government was able (through several successful policies) to reverse the foreign currency reserve deficit into a surplus. As a result, the price of the dollar, which businessmen at the time assessed to be LE5 in market terms, subsequently went down to the current approximate range of LE3.50. Now, we are suffering a reverse situation, where foreign currency reserves have dwindled, and the current exchange rate no longer reflects their actual status, leading to questions over its viability."
The continuing liquidity shortage in both local and foreign currency reserves is rekindling the debate. Investors say that an exchange rate that reflects supply and demand will help them assess the costs of their import requirements and projects based on real projections. As for the government, it would have to look into how production and labour will be affected in the case of any exchange rate liberalisation.
But should the pound be devalued now?
The US economy, the world's strongest, is an extreme instance of a wholly floated exchange rate. The Federal Reserve Board abstains utterly from intervening in its daily workings, and only follows its evolution up on a long-term basis. The Bundesbank and Bank of Japan, on the other hand, monitor their exchange rates more closely. From totally liberalised exchange rate regimes to totally fixed ones, there are gradations, but the general trend has been for countries' monetary policies to work towards more flexibility.
If currency assessments are based on economic strengths (productivity, prospects for further growth, performance on world markets, investment pull and effective resource administration), then the pound must not be devalued -- at least, not now.
In the absence of the above requisites, and in the absence of a strong domestic financial and banking system fully equipped to engage in global trade while curbing risky capital outflows, devaluation of the pound will exact serious economic and social costs. The lesson has been learnt from the monetary crises that swept across Europe in the early '90s, and through Asia, Mexico and finally Russia in 1998.
The exchange rate and foreign currency reserves are not sacred; like all monetary tools, they must be adapted to the market's needs. But if devaluation is in order, the economy's underlying weaknesses must be addressed.
