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Al-Ahram Weekly On-line 9 -15 November 2000 Issue No.507 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly On-line 9 -15 November 2000 Issue No.507
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Books Travel Living Sports Profile People Time Out Chronicles Cartoons Letters One step forward, one back?
By Niveen Wahish
The Central Bank of Egypt recently issued a number of recommendations to banks intended to stabilise the currency exchange market. The most controversial of these was its proposal to place a daily limit on cash withdrawals or deposits from banks at $20,000. This recommendation, in particular, caused panic. To those in the business sector, it appeared as though CBE officials had forgotten about a law protecting an individual's freedom to possess foreign currency and to withdraw or deposit it as they wish.
Shortly following the issuing of the recommendations, Prime Minister Atef Ebeid announced that there would be no restrictions on foreign currency transactions in Egypt. According to CBE governor Ismail Hassan, the $20,000 limit was proposed only as a guideline for banks and not a restriction, and no such limit was placed on bank checks or travellers' checks. Nonetheless, two weeks later, because of the controversy, the CBE withdrew this recommendation and announced that the size of daily withdrawals and deposits should be left to the discretion of the banks.
But not everyone in the banking sector is happy about CBE's backing down on this issue. Amr Bahaa, a banker, said "It was probably the only correct decision the CBE has made in a long time." Such a ceiling would have enabled banks to regain their position as leaders in the foreign exchange market -- a role which is, in fact, currently played by exchange companies. Because conducting business through cash transactions -- as opposed to cheques or credit cards -- is preferred by Egyptians, even when conducting foreign business, exchange companies have assumed a disproportionate importance as banks have effectively restricted provision of foreign currency. Contrasting this situation with that abroad, Bahaa said that although in France clients' accounts are only in French francs, banks make available foreign currency to account holders should they request it.
The only drawback regarding the CBE's subsequently rescinded recommendation, according to Bahaa, is its timing. Such a decision, he said, should have been made two years ago. "Even so, when the CBE made the decision, it should have stuck by it."
In fact the speed at which the CBE revoked its recommendation was telling in and of itself. This brought into question the autonomy of the CBE as it appeared that it reversed its decision following government pressure to restore calm in the market. "Who made the decision and who cancelled it?" queried professor of finance and financial institutions, Mounir Hindy. But CBE's Hassan, speaking recently to economic journalists, noted that he regularly consults with government officials and insisted that the CBE is autonomous.
Hindy also criticised the swiftness with which CBE backtracked on its recommendation as "unacceptable." Effective management of monetary policy, Hindy explained, requires that decisions be made based on careful consideration.
The ceiling on cash withdrawals and deposits was part of a larger package of uncontroversial proposals to regulate the currency exchange market with the aim of curbing the decline in the pound's value and reducing speculation. The CBE affirmed that banks should meet demands for hard currency. Towards making this feasible, CBE said that it would cover any gap between the banks' foreign currency resources and clients' demand. Banks should use their own hard currency, and that made available by the CBE to meet their clients needs. Foreign currency, said the CBE, should be made available to clients whether to open letters of credit, pay debts or to transfer investment revenues.
Added to this, CBE directed banks to keep the difference between the buying and selling prices for hard currency within reasonable limits. Speculation on the Egyptian pound, stressed the CBE, is unacceptable. Accordingly, it decided that Egyptian pounds should not be lent against long-term deposits in hard currency as collateral. The goal of this measure is to encourage account-holders to use their own hard currency resources. This would replace the practice whereby a loan is taken in pounds and then changed into a foreign currency to finance investments. Such a practice allowed the account-holder to maintain their hard currency deposits while increasing the demand for foreign exchange. CBE also decided that foreign banks should no longer be allowed to hold portfolios in Egyptian pounds.
These measures, said Hassan, should allow pounds to be exchanged for dollars at a rate ranging between LE3.83 and LE3.88, rather than LE3.9 -- the figure at which dollars were sold at the end of September.
However, CBE's decisions, according to financial experts, will not end the Egyptian pound's woes. The CBE governor himself said last week that these measures are only a short-term solution and that other guidelines are needed. He pointed out that imports, which exceeded $17 billion last year, are eating up any revenues from tourism, remittances, oil revenue and exports.
Nonetheless, the CBE is optimistic about the inflow of foreign exchange. Hassan pointed out that the minister of petroleum had announced that in 20 months, Egypt will stop importing Butane gas, a measure which is expected to ease some pressure off the import bill. Moreover, oil export revenues have shown signs of improvement. While these were approximately $1 billion in 1998/99, they are expected to more than double this year. And tourism revenues for the same period are also expected to reach over $4 billion -- a healthy increase over last year's US$3.2 billion.
Until things improve, the CBE will continue to provide banks with foreign currency. The CBE diverts foreign currency from the country's foreign revenues or draws from the reserves which had decreased to $14.642 billion in July 2000, according to the latest Ministry of Economy reports.
While the decline in the reserves has worried some observers, CBE's Hassan commented recently, "What use are the reserves if we cannot use them when we need them?" He added that as long as the reserves are within safety limits -- that they are sufficient to cover more than six months of imports -- there is no reason for concern.
In fact, the size of the reserves is not a problem in itself, says professor Hindy. "Part of the problem is psychological," he said. Hindy cited statistics showing that the amount of hard currency in Egypt has not fallen drastically. While reserves peaked in September 1997 at $20.6 billion, hard currency held by banks was approximately $1.6 billion. And although in June 2000, government reserves had decreased to $15.1 billion, banks held approximately $4 billion in foreign exchange. While its distribution has undergone a noticeable change, the actual amount of hard currency in Egypt has only decreased by a little more than $2 billion.
Hindy suggests that the CBE pump foreign currency into the market on a regular basis. One-off injections of currency do little to reassure business. He also proposed that the government lower its target growth rate of six per cent. "As long as that [rate] is there, there will be a constant demand for hard currency." He proposed that growth of three to four per cent be targeted for the short-term. Another practical measure, Hindy suggested, would be to allow the pound to gradually increase towards its real exchange value rather than "strangle it" while continuing to pump dollars into the market. At a certain point the exchange rate will make imports too expensive, which would accordingly discourage buyers. Not finding a market for their expensive goods, importers will decrease their imports, which should ease the pressure on the pound, he explained.
One frequently suggested measure to encourage the public to exchange their dollars for pounds is raising the interest rate on Egyptian currency. Hassan criticised this suggestion saying that raising interest rates, although attracting savings, would also increase the cost of borrowing and thus impact negatively on the rate of investment. But proponents of this measure say that although interest rates should not be raised as high as 18 per cent -- the rate in the early 1990s -- they may be increased slightly. Last week, the ministerial economic group decided to raise interest rates on the National Bank of Egypt's investment certificates by one per cent to reach 12 per cent, while rates on post office savings were increased by 0.5 per cent annually.
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