20 - 26 December 2001
Issue No.565
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Al-Ahram Weekly Online 20 - 26 December 2001 Issue No.565 |
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Third time lucky?
Once again, the Egyptian pound is being devalued. Niveen Wahish reports
In yet another attempt to stabilise the value of the pound against the dollar, the Central Bank of Egypt (CBE) has announced that the new central rate for the dollar is LE4.50, up from LE4.15, the central rate which has prevailed since August. This year's third devaluation of the pound includes a three per cent margin for fluctuation above and below the central rate, making LE4.365 the lowest price for the dollar and LE4.635 the highest.
Abul-Oyoun
The 7.8 per cent devaluation comes within the framework of the managed peg currency system introduced by the Egyptian government in January 2001 after a steady decline in the pound which began in May of the previous year when the government abandoned a nine-year peg of approximately LE3.40. In January, when the new system was introduced, the central rate was set at LE3.85 with a one per cent margin of fluctuation. In August the system was modified. The central rate was subsequently raised to LE4.15, and the margin of fluctuation was widened to three per cent.
According to Mahmoud Abul- Oyoun, CBE governor, speaking at a press conference, the new rate may be modified again. A CBE press release said the bank will review the suitability of the new central rate "at least on a weekly basis, and will adjust it in light of market conditions to ensure adequate liquidity in the foreign exchange market."
The move to raise the central rate comes following the high demand for the dollar during the past two months. The CBE governor's failed attempts to rein in demand for hard currency had caused the dollar to shoot to LE5 in the black market. The central rate that went into effect in August had been working well until the attacks in the US on 11 September precipitated a drop in tourism receipts and shattered hopes for improved economic performance.
Alongside the modification to the central rate, the CBE is taking a number of measures to ensure that the new rate works. All banks are to register their foreign currency transactions -- in terms of their number and value -- and inform the foreign currency statistics room at the CBE every hour until noon. The CBE will calculate the average rate each hour and announce it to the market. As for transactions that take place after noon, those are to be reported to the room at 8am the following morning.
The CBE will also support the market by making the hard currency available as needed. As Prime Minister Atef Ebeid announced a day before the new central rate was made public, the CBE will pump around $2 billion into the market during the coming period of which $500 million will be disbursed immediately to cover the gap between demand and supply that has accrued since 11 September. An additional $1.5 billion will be made available to the market over the next six months at a rate of $250 million per month.
Abul-Oyoun explained that the needed cash will be provided partially from the CBE's own reserves. The CBE press release assured that its "international reserves, will remain at a comfortable level." The rest of the needed sum will come from international and Arab funds. A sum of $150 million will be drawn from Egypt's own reserves with the International Monetary Fund. The same amount will be withdrawn from the Arab Monetary Fund, which will also provide a $150 million-loan that had been agreed upon before the events of September. In addition, Egypt has concluded agreements with the World Bank, the African Development Bank and the US Agency for International Development to provide additional resources to help the country face the economic effects of 11 September.
The CBE has also stressed that no restrictions on access to foreign currency will be imposed. In fact, as Ebeid said, the idea to suspend import transactions through documentary collections was merely a recommendation by CBE, not a binding decision.
However, officials are hopeful that the new central rate might have the positive effect of decreasing luxury imports, boosting exports by making them cheaper abroad and encouraging local production by increasing demand for it.
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