25 - 31 January 2001
Issue No.518
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Al-Ahram Weekly On-line 25 - 31 January 2001 Issue No.518 |
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Setting the limits
The annual policy statement delivered by Prime Minister Atef Ebeid before a packed People's Assembly went some way at least towards a long overdue clarification of the government's exchange rate policy. During a week in which the pound slumped to a ten-year low against the dollar, settling at LE4.25, Ebeid announced that the Central Bank of Egypt (CBE) is to assume full responsibility in controlling and regulating the market.
Since monetary authorities loosened their grip on the dollar last May, abandoning a nine year peg of LE3.30-3.40, the pound has been subject to a crawling devaluation, the downward pressure a result, said Ebeid, of a speculative free for all.
The CBE has now been charged with the setting of "safe limits" within which the pound-dollar exchange rate will be allowed to fluctuate. And the formula the bank will adopt, revealed Ebeid, will be to fix a base according to the average price of foreign exchange transactions over the previous three weeks around which the exchange rate will be allowed to move up and down within a band of two per cent.
The difficulties currently faced by the pound reflect deep seated imbalances within an economy that is running an escalating budget deficit and faces a growing import bill which, in 1999-2000, had already reached $17.8 billion, pushing the trade deficit up to approximately $12.5 billion. Given such profound structural imbalances, many commentators have viewed government attempts to blame foreign exchange bureaus for pushing down the pound through speculation as disingenuous.
Exchange bureaus now face a stricter regulatory regime, with tougher penalties being exacted for violations of existing codes of practice. Indeed, on Monday, the same day the prime minister made his policy statement, the Ministry of Economy and External Trade ordered the temporary closure of five exchange bureaus alleged to have engaged in speculative transactions and withheld hard currency.
While conceding that some violations have taken place, Mohamed El-Abyad, head of the Foreign Exchange Division of the Federation of Chambers of Commerce, insists that the exchange companies themselves can hardly be accused of causing the problem given the tiny fraction of total transactions for which they account.
Analysts have, on the whole, welcomed Ebeid's announcement and its provision that the Central Bank will monitor the exchange rate while allowing it to react to market forces.
"It is a long-awaited step," according to Ahmed Galal, executive director of the Egyptian Centre of Economic Studies, arguing that while a fixed rate regime worked well in the period from 1990-1997, when Egypt was in the stabilisation phase of its reform programme, the policy is now unsustainable.
While an overvalued pound has had a devastating impact on Egypt's exports, and played a significant role in the widening trade deficit, Galal further points out that import-restrictive policies coupled with the draining of its foreign reserves were "not what we should have been doing".
"We were somewhere between fully fixed regime and a fully flexible one. We were not telling anyone what we were doing and this led to speculation and the flight of capital," he explained.
Ahmed El-Ghandour, economics professor at Cairo University and a former CBE board member, while praising the decision to allow the CBE to fully monitor and regulate the foreign exchange market expressed reservations about the mechanism presented by Ebeid.
Calculated on the average price of the last three weeks, the base price does not reflect the real value of the pound versus the dollar, El-Ghandour argues. The government should have left the determining of the value of the base price to the CBE which could then take into account the inflation rate, the budget deficit and global inflation levels.
And both El-Ghandour and Galal believe that the two per cent margin for fluctuation is too restrictive and will force the government to intervene to head off downward speculative pressures far too often for comfort.
Mahmoud Fahmy, a former head of the Capital Market Authority, gives a different interpretation of Ebeid's statement: "This should not be interpreted as an administrative decision to control the exchange rate. It is -- in fact -- a political announcement meant to reassure the market that the Central Bank will play its role in monitoring the exchange rate, exercising its prerogatives according to the Central Bank and Banking Sector Law as well as the Banking and Credit Law."
The general consensus, though, is that pressures on the exchange rate will continue as long as structural defects related to export performance and productivity remain unresolved. And it is precisely these defects that are at the root of the government's current examination of the possibility of resuming cooperation with the International Monetary Fund. The aim of any agreement between the two sides would be to help Egyptian government officials administer the economic and monetary policies needed to pull the economy out of its current difficulties.
Yesterday, President Mubarak held a meeting with cabinet's economic group and the CBE's governor Ismail Hassan. The results of the meeting were not revealed at the time Al-Ahram Weekly went to print.
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