27 Sep. - 3 Oct. 2001
Issue No.553
|
Al-Ahram Weekly Online 27 Sep. - 3 Oct. 2001 Issue No.553 |
||
| Published in Cairo by AL-AHRAM established in 1875 | Current issue | Previous issue | Site map | ||
In the right direction
A new set of reforms is apparently what Egypt should aim for to boost the resilience of its economy. Niveen Wahish reports
Throughout the past two weeks the value of the dollar against all international currencies has dropped. Central banks around the world pumped money into the markets to avoid a liquidity crisis. In Egypt it was a different story. The dollar dropped against the Egyptian pound by only a piastre during the days following the attacks in the US, but was later traded at the usual rate of LE4.25 to LE4.27.
Hassan Hamdi, a teller at a currency exchange bureau, said that the events in the US have barely affected their transactions. In fact, individuals do not think there is any reason to get rid of their dollars yet. Howaida El-Amir, a housewife whose husband works abroad, says that she only changes the dollars her husband sends her when she needs to.
Since the exchange rate of the Egyptian pound versus the dollar is determined by the Central Bank, said Ugo Panizza, of the American University of Beirut's department of economics, "It will drop only when the Central Bank decides to modify the parity."
The impact, or lack thereof, of the events in the US on the Egyptian pound, is a reflection of the limited flexibility allowed for the exchange rate.
Panizza was recently at the Egyptian Centre for Economic Studies in Cairo to present a paper he prepared titled "Macroeconomic policies in Egypt: an interpretation of the past and options for the future." Panizza remarked that although the Egyptian government has allowed the pound to depreciate against the dollar by around 20 per cent since July 2000, it has been following a rather "reactive exchange rate policy and allowed for depreciations only after the development of dollar shortages and of a black market exchange rate."
Nonetheless, since August, when the exchange rate was last modified, the situation has been stable. The rate is currently LE4.15 with the margin of fluctuation set at three per cent above and bellow this central rate.
The new exchange rate system was accompanied by a more flexible monetary policy. The discount rate was decreased by one per cent since the beginning of this year. And, just last week the Central Bank of Egypt announced the decrease of reserve requirement in banks from 15 to 14 per cent of their deposits, a move long called for by bankers.
The move towards a more flexible exchange rate not only allows some use of monetary policy to manage the economy, but also enables the government "to deal with major shocks."
While these are all steps in the right direction, suggested Panizza, he also recommended that Egypt should gradually shift its focus from the exchange rate anchor to an inflation- targeting regime.
The move towards a flexible exchange rate system should be gradual. Panizza recommended that the dollar peg first be substituted by a trade-weighted basket of currencies.
While managing the transition towards a more flexible exchange rate regime, the government should create the necessary conditions for establishing an inflation-targeting regime. Accomplishing the latter, according to Panizza, requires granting formal operational independence to the Central Bank. And it is also important to strengthen the Central Bank's institutional capacity by investing more resources in its research department. Along with this comes the need for a modern, competitive and well-regulated financial system.
On the fiscal policy side, Panizza points out that Egypt should adopt counter-cyclical policies. "By running surpluses during periods of economic expansion, emerging market countries can establish a reputation for fiscal prudence and create the conditions that would let them borrow at a reasonable interest rate during economic downturns."
The key to a counter-cyclical fiscal policy, according to Panizza, is the ability to solve the problems that are at the roots of the structural fiscal deficits faced by many emerging markets. In developed and emerging markets the set of procedures and practices according to which budgets are drafted, approved and implemented, play a fundamental role in reducing fiscal deficits.
Fiscal discipline, said Panizza, is enhanced by multi- annual fiscal policy programmes that impose a limit on spending and deficits. He also suggests limiting the extent of budget amendments recommended by parliament and eliminating the possibility of changing the budget during the implementation period. This can be done through the adoption of a procedure in which the size of the deficit and the level of spending are voted on first, followed by a vote on budgetary allocations. Deficits are also reduced by procedures that improve the transparency of the budget and that do not allow the state to assume debt contracted by other public agencies or local administrations.
© Copyright Al-Ahram Weekly. All rights reserved
 |
|
|||||||||||||||||
| ARCHIVES Letter from the Editor Editorial Board Subscription Advertise! |
WEEKLY ONLINE: www.ahram.org.eg/weekly Updated every Saturday at 11.00 GMT, 2pm local time weeklyweb@ahram.org.eg |
 Al-Ahram Organisation |
Recommend this page