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Al-Ahram Weekly On-line 5 - 11 October 2000 Issue No. 502 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly On-line 5 - 11 October 2000 Issue No. 502
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Elections Region International Economy Opinion Culture Focus Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Pound for pound
By Aziza Sami
The sliding value of the Egyptian pound is an understandable cause of concern for many. Explanations vary as to the reasons that lie behind the pounds plunge to 379 piastres to the dollar. Some cite the rising import bill, others blame market speculation, while yet others accuse the Central Bank of Egypt of failing to intervene in the market to stabilise the pound.
Whatever the differences of opinion a kind of consensus has emerged that the two-pronged problem of the liquidity shortage and high dollar constitutes a chronic economic problem, stifling even the most basic transactions needed for investment. The banks, the stock market, exchange bureaus and most of all, importers and producers are suffering as necessary transactions become increasingly expensive. Tellingly, by last week foreign purchases accounted for only 17 per cent of stock market transactions.
Stock market investors now face not only a reduced value for their portfolios, but the fact that profits, obtained in Egyptian pounds, are losing value once converted into dollars. Increasingly anxious local savers are also beginning to attempt to protect the value of their assets by converting them into dollars, leading to the spectre of a return to the dollarisation of five years ago, a phenomena that seriously exacerbated existing pressures on hard currency reserves.
In diagnosing the problem, former vice governor of the Central Bank Fa'iqa El Rifa'i said in an interview with the weekly magazine Al-Ahram Al-Iqtisadi that the exchange rate policy in Egypt had from 1997 till June 2000 aimed at attaining stability while simultaneously protecting levels of foreign currency reserves, an almost impossible balancing act to pull off.
She further argued that the central bank had on three occasions abstained from injecting foreign currency reserves in the economy when it would have been beneficial to do so: during the Asian crisis, after the Luxor tourist massacre, and during the oil crisis of December 1997. The banks and exchange bureaus consequently suffered a currency shortage, with the latter repeatedly selling at prices higher than those they announced, a situation that reinforced expectations that the pound would be devalued. This continued until last June, when the Central Bank began to follow a more flexible exchange rate policy, responsive to the market.
The government, then, has increasingly come to acknowledge that greater flexibility towards the exchange rate is necessary. This acknowledgment, though, is unlikely to reassure a jittery market, and until productivity and export figures show a marked improvement pressure will continue in the direction of a further devaluation. The national currency, as yet, does not reflect the weakness of Egypt's economic fundamentals.
The associated problems are going to be far from easy to resolve, with any exchange rate policy having to take into account not only the demands of the market but how the issue of increasing productivity is to be tackled by both the private sector and the government.
El-Rifa'i, who even as she held a key position in the central bank was consistently more outspoken on the issue than any of her peers, believes that the adoption of a rigid policy that virtually ignored market pressures during the past three years has led to the current situation.
Past experience has shown that the head of the cabinet and the Ministry of Economy have both had their say on how the central bank should act on the currency issue. At a time when not only in Egypt, but across the global financial system exchange rate policies are being revised, the situation appears increasingly to demand a significant shift in attitude in government circles. The views of experts -- especially those who have been involved in the daily workings of the monetary system, should be taken into account, and the exchange rate issue should become less subject to political considerations.
