29 March - 4 April 2001
Issue No.527
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Al-Ahram Weekly On-line 29 March - 4 April 2001 Issue No.527 |
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| Published in Cairo by AL-AHRAM established in 1875 | Current issue | Previous issue | Site map | ||
Greenbacks back to square one
The foreign currency black market was becoming an increasingly distant memory. It's back. Sherine Abdel-Razek reports on the woes of the new exchange rate regime -- two months on
After a sharp fall of the Egyptian pound against the dollar early this year, the government's introduction of a new monetary policy two months ago of pegging the pound to a central rate of LE3.85 to the dollar has been successful in stabilising the local currency. Since then, however, the coveted green notes have all but disappeared.
Much scepticism has surrounded the effectiveness of the new exchange rate regime, with experts warning against the possibility of it leading to a black market. Their worst fears have come true.
Dollar notes are very hard to come by these days. Importers desperate to acquire needed hard currency to cover their trade commitments are no luckier than common citizens looking for smaller sums to travel abroad.
Banks and foreign exchange bureaus are giving out no more than $1,000 to customers and only upon presenting valid travel documents (visa and travel ticket). Customers' documents are then marked to show they have received their allotted quota in order to prevent them from buying again somewhere else. Price monitors on bank branches in Cairo's hotels now display only the buying rates of the dollar, as there are none to sell.
Needless to say, people are now buying their dollars through non-official channels. Numerous foreign exchange bureaus have closed their doors, refusing to sell their dollar holdings at the official price, while selling them at higher prices to customers over the phone. According to a tour guide who changes money for tourists, the black market rate has reached LE4.10.
"This is a natural outcome of the new regulations and the arbitrarily determined exchange rate," a foreign exchange official at a joint venture bank, who requested anonymity, said. He added that people are now hoarding their dollar holdings in anticipation of a further rise in price.
According to the banker, the Central Bank of Egypt (CBE) is not covering commercial banks' foreign exchange shortages, which are rumoured to total $150 million. Although CBE officials said the figure was exaggerated, they declined to give their own estimate.
Meanwhile, exchange bureaus are facing rough times. "Transactions value has declined by 80 per cent since the introduction of the regulations," said Mohamed El-Abiad, head of the foreign exchange division at the Egyptian Chambers of Commerce Federation.
"Customers used to prefer doing business with bureaus rather than banks as we used to offer higher prices, but now, we are all selling and buying at the same rate," he explained.
Exchange bureaus are struggling to secure a court ruling against the Ministry of Economy for the amendments it has introduced to money Law 38 for the year 1994, which require these companies to raise their minimum capital from the current LE1 million to LE10 million.
El-Abiad said more than 50 exchange companies have filed individual suits against the ministry, which has transferred control of the exchange companies to the CBE. The ruling has been postponed till 3 April, almost three weeks prior to the deadline set by the Minister of Economy for the companies to comply with the new capital requirements, either by widening their ownership base or through merging with other exchange companies.
According to El-Abiad, the new requirement is completely unrealistic in light of the new regulations, which deprived the bureaus of their usual dollar influx. "Even if we can secure this capital requirement, wouldn't it be more lucrative for us to invest it in a bank deposit rather than in operating the bureaus and having to deal with the problems associated with the CBE's excessive control measures?"
Introduced to put an end to the steep depreciation the Egyptian pound witnessed during the second half of 2000 and early January 2001, the new regulations are not what experts now believe to be either a feasible economic instrument or a panacea for the economy's problems.
The economy has fallen victim to successive liquidity and dollar shortage problems emerging from huge capital spending and drainage of foreign currency resources.
Nothing can be more indicative of the extent of the country's economic troubles than the ballooning trade deficit, which came to $12.5 billion for the year 1999-2000, and a budget deficit that has climbed to three per cent of GDP mid-last year.
"Unless we start dealing with the roots of the problem by facing the macroeconomic imbalances, all monetary, fiscal and economic policies will prove to be infeasible," the bank official said.
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