10 - 16 August 2000
Issue No. 494
|Published in Cairo by AL-AHRAM established in 1875|
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Holding onto the dollarBy Niveen Wahish
Two years ago, purchasing any amount of dollars was easy. Today, it is difficult to obtain even US$1,000 -- the minimum one would need if travelling abroad, for example.
The exchange rate advertised by banks is set at approximately LE3.48 per US$1 to sell and LE3.49 per US$1 to buy. It seems, however, that banks post these rates as a formality. Typically, someone trying to purchase dollars is told that they are not available and that posted rates are applicable only for transfers or opening letters of credit.
Inas Fadel, an office-worker at a private company, recently faced such a situation, which was resolved only through bargaining with bank personnel. Since she holds an account at the bank where she sought to purchase dollars, Fadel was personally acquainted with some of its employees. After some haggling, she obtained the US$1,000 she needed, but not at the advertised rate of LE3.49. Instead, she paid LE3.56 per dollar -- the rate at which the dollar may be bought from private exchange companies.
Even though the latter sell the dollar at rates higher than bank rates, they, too, still suffer a shortage of supply. The manager of an exchange company in Zamalek commented that his company does not have dollars to sell, because no one is exchanging them.
Over the past two years, the government has been fighting to keep the dollar at the LE3.40 level it has maintained since the early 1990s. But a variety of factors caused a scarcity in the dollar supply which led its price to increase. The decline in revenues from the Suez Canal, from tourism -- following the 1997 massacre of tourists in Luxor -- and in income from oil all hit the government's balance of payments hard. But monies from tourism and oil have since exceeded earlier levels. Importers exacerbated the situation by rushing to buy and store Asian products, which became very cheap following the East Asian crisis.
At that time, experts say, it became evident that Egypt was on the verge of a problem, yet the government refused to admit this and may have actually made things worse.
A report issued by the US investment bank Merrill Lynch on Egypt's economy cites that "a reluctance on the part of the Central Bank of Egypt (CBE) to supply US dollars to the market became problematic by mid-1999 when commercial banks had drawn down their foreign assets to about $1.7 billion, from $9 billion in mid 1997." Moreover, "despite pressure on the exchange rate, interest rates remained substantially flat through 1998 and domestic credit growth accelerated from 13 per cent in 1997/98 to 19 per cent in 1998/99."
But things improved following the new cabinet's formation last fall. The Merrill Lynch report states that since the new government assumed power, a number of steps were taken to rectify the situation: these included injecting dollars from foreign currency reserves into the market, raising interest rates, and slowing the provision of credit.
But the government's intervention took its toll on Egypt's US$20 billion in reserves, which had been the pride of the government. Ministry of Economy figures show that in March, Egypt's reserves dropped to $15.6 billion. However, the CBE's governor was recently reported as saying that at this level, reserves are sufficient to cover 10 months of imports of goods and services. This is more than double the amount considered "safe" by international standards.
While pumping dollars into the market, the government also relaxed its hold on the Egyptian pound and allowed for a slight devaluation to ease the difference between the bank rate and that offered by foreign exchange companies. This measure allowed the banks' exchange rate to creep upwards from approximately LE3.40 to approximately LE3.55.
In the absence of a clear strategy by which it is tackling the situation, the government's piecemeal approach created uncertainty, according to one expert affiliated with a foreign financial organisation. He said "The worst thing about the government's denial of a problem is the negative impact on the willingness of foreign investors to enter the Egyptian market."
He explained that investors fear that their investment will be worthless in the future, or that their assets will "become hostage" to the lack of foreign currency, especially when they try to liquidate or repatriate profits.
But the situation is not totally bleak. The same expert said that in spite of the dollar situation and the recent downgrading of the outlook for the economy by some rating agencies, Egypt is still considered investment worthy. "We are going through some problems, but this does not mean we are heading for disaster. There is space for corrective action."
Observers have plenty of advice to offer in this regard. One banker who spoke to Al-Ahram Weekly on condition of anonymity suggested that the interest rate on the pound should be raised in order to make it attractive for those holding dollar deposits to convert them to pound deposits. A similar policy was followed when the government began to implement a structural adjustment programme during the early 1990s and banks raised interest rates to 18 per cent. The same banker also suggested that the government try to mobilise long-term foreign loans for its projects, instead of drawing on local sources of foreign currency. Another suggestion is to accelerate the privatisation process, especially of the utilities sector which is expected to attract foreign investors and hard currency.
However, he warned against the devaluation of the pound. This measure, he said, is not in Egypt's interest because it would inflate its import bill which is already more than US$17 billion. Likewise, it would not help to increase exports because the main problem with Egyptian exports is not their cost, but their quality. "No matter how cheap they get, they are not up to required standards."
Recent indicators suggesting slight improvements in the currency situation would seem to bode well for the long term. Citing figures for the balance of payments during the third quarter of fiscal year 1999/2000, the Merrill Lynch report notes that the current account deficit has narrowed significantly. It also points out that the drain on foreign reserves declined during the same period, with the capital account deficit declining from $650 million to $94 million. The report adds, "This trend is expected to continue in coming quarters, with further reserve losses, but at a more gradual pace thanks to higher interest rates, improving current account numbers and privatisation inflows. Combined with still significant capital controls, this suggests that the authorities will almost certainly be able to hold the exchange rate at, or very near, current levels."