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Al-Ahram Weekly On-line 12 - 18 October 2000 Issue No. 503 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly On-line 12 - 18 October 2000 Issue No. 503
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Elections Palestine International Economy Opinion Culture Books Interview Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Fighting over dollars
By Gamal Essam El-Din
The Central Bank of Egypt (CBE) decided last week to inject US$400 million into the market to help banks meet their customers' demands for dollars and cover letters of credit.The CBE's decision was taken following two sudden and extended meetings of the CBE governor and board of directors with the chairmen of more than 60 public and private banks.
Money market watchers received the decision with a sigh of relief, although they criticised it as too slow in coming. By bringing the three-week-long escalation in the value of the dollar under control, CBE is finally sending positive signals to local and foreign investors regarding Egypt's monetary policy, say observers.
This most recent crisis began in the middle of last month when a limited supply of dollars precipitated a severe increase in the value of the dollar against the pound. At the end of last week, the dollar was traded on the market at LE3.93, climbing from LE3.47 in early September. This represented a plunge of 8.6 per cent in the value of the pound, and the lowest level it has reached since July 1996. These fluctuations have occurred against the backdrop of a recession and a decline in CBE's dollar reserves from $16.8 billion in August 1999 to $13.9 billion in August 2000.
Most significant about the dollar shortage, however, was the extent to which the majority of banking officials laid the blame for the situation on Money Exchange Companies (MECs). Increasing oil prices and the relatively high revenues from tourism should have brought sufficient foreign currency into the market to forestall the need for raising exchange rates, say officials. "The recurrence of the rise in the value of the dollar at MECs to unprecedented levels for a few days, which was then followed by a sudden improvement in the value of the pound, demonstrates that the dollar crunch is artificial," said CBE's governor Ismail Hassan.
Based on this analysis, CBE has decided to restrict MECs activities, at least temporarily, so that they do not engage in speculation on the dollar. "The role of MECs will be limited, in the coming period, to meeting the needs of ordinary citizens, for travel and tourism, in particular," Hassan said.
CBE officials were not the only figures to criticise MECs last week. Two days ahead of the CBE meetings, President Hosni Mubarak held a high-level meeting to discuss the impact of the increase in the value of the dollar on the national economy. Prime Minister Atef Ebeid said that he had presented a report to Mubarak "on the role of MECs in pushing the exchange value of the dollar beyond regulated limits for no economically justifiable reason." In response, President Mubarak said that speculation by MECs, which is illegal, should be dealt with.
Apart from the official viewpoint concerning the dollar crisis, economic experts are divided over its real causes. Abdullah Tayel, chairman of parliament's economic committee, told Al-Ahram Weekly he agrees that "there are no objective reasons to justify the recent increases and decreases in the value of the dollar." First, he said, it is by no means logical that the difference between the exchange rate at MECs and that in banks should reach 25 piastres in one day. "There is no reason for this except that this sudden rise is caused by unlawful speculation," Tayel said.
Tayel also noted that recent economic indicators show that the foreign exchange inflows into Egypt over the last six months have increased considerably. Figures released by the Ministry of Economy and Trade last month indicate that the trade deficit decreased from $12.5 billion in June 1999 to $11.5 billion in June 2000, while the value of exports increased from $4.4 billion to $6.3 billion over the same period. As for the foreign reserves in Egyptian banks, the ministry's statement said they increased from LE56.5 billion to LE60.5 billion during the period from January to June of this year. The value of direct foreign investment is also on the rise, having increased from US$711 million last year to US$1.656 billion this year. Of particular importance is that dollar revenues from oil exports increased from $79 million in July 1999 to $111 million in July 2000. As for tourism, revenues increased from $1.4 billion to around $2 billion from January to July this year.
"All of these indicators show that there is a reasonable supply of dollars and the national economy is performing well," Tayel said. He also noted that the CBE provided banks with approximately US$5 billion over the past two years to meet the demand for dollars.
Tayel, however, noted that not all dollar revenues go to the banks. "The revenues generated by oil exports and Suez Canal traffic go to the CBE, while only a portion of hard currency from tourism and from the remittances of Egyptian workers in Gulf countries goes to banks, with the rest going to MECs," said Tayel. All in all, he added, the size of foreign exchange traded by MECs does not exceed 10 per cent of the total value of foreign currency in the market. MECs, said Tayel, do not use their foreign currency to meet the demand of individuals. "What is actually happening is that MECs are concentrating on meeting the currency needs of the export and import operations of big businessmen. This practice should be banned immediately so that banks return to being the main venue for meeting the export and import requirements," Tayel argued.
Currently the value of the dollar has stabilised at rates agreeable to both CBE and MECs. The rate at MECs is LE3.77, and LE3.61 at banks.
MECs denied accusations that they are to blame for the recent dollar shortage. Mohamed Hassan El-Abiad, chairman of the Division of MECs at the Chamber of Commerce, attributed the recurrent rise in the dollar exchange rate to the fact that the Egyptian pound is overvalued. "We have urged officials many times to issue more realistic exchange rates for the dollar. The fact that the dollar is undervalued and the Egyptian pound is overvalued discourages investors from dealing with banks, ultimately leading to speculation," said El-Abiad.
Joining forces with El-Abiad, Bilal Khalil, deputy chairman of the Division of MECs, said that investors lack confidence in the banks. "The dollar requirements of investors have largely increased, while banks have not catered to the needs of these investors. For most of them, MECs were the last resort. This pressure caused a dramatic rise in the value of the dollar for which we are not to blame," said Khalil. For Khalil, the CBE decision to restrict MECs to providing small amounts of exchange to individuals rather than companies, is unrealistic. "This will not solve the problem at its root. Instead it will exacerbate the situation because the exchange rate policy, as a whole, is in dire need of scrutiny," said Khalil.
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