Stable yet vulnerable
Although the Egyptian pound has had a relatively stable year, it will remain vulnerable to external shocks unless there is an improvement in Egypt's wider economy
For the Egyptian pound, 2002 was marginally better than 2001, a year in which it lost nearly 35 per cent of its value against the dollar. Although the exchange rate has had a stable year, many of the underlying elements behind the crisis remain largely unresolved.
In December 2001, the dollar exceeded LE5.50 leaving the foreign exchange market and the entire domestic economy in a state of shock.
Many factors combined to generate this crisis. The impact of 11 September on tourism, oil prices and the Suez Canal led to a huge contraction in foreign currency revenues. This created a situation whereby the official exchange rate did not represent the real value of the pound, opening the door to widespread currency speculation.
In an attempt to save existing resources, the central bank limited the use of foreign currency reserves to a bare minimum and followed a twofold policy of devaluation and attacking currency speculators.
Just one day before the 2002 New Year, the Egyptian Central Bank devalued the pound from LE4.15 to LE4.50 to the dollar. Fifteen days later, it was devalued again to LE4.51 to the dollar, with a margin of fluctuation of three per cent. Meanwhile, the government attempted a clamp down on the black market. Ten people were subsequently arrested and charged with currency speculation.
A steady, central bank governed, rate of LE4.51 continued for the whole year. The government had succeeded in preventing a free-fall of the pound and prevented the market from total collapse, yet the tension persisted and could be seen in some cases of fluctuation.
In February, despite international donors making vows to bail out the Egyptian economy, the black market continued to trade at about LE4.8. Then, in April, a rising demand for the dollar by importers led the black market rate to break the LE5.00 point again. The official exchange rate, however, remained unchanged.
A strong Euro during the second half of the year helped to keep the exchange rate situation stable. Additionally, revenues from the Suez Canal rose slightly during the first ten months of the year to $1.609 billion compared with $1.6 billion for the same period of the previous year.
But disturbing elements remained. Experts stressed the necessity of raising the margin of fluctuation to 10 per cent as a precondition for the official rate to represent the real value of the pound.
Also, net international reserves declined to $13.912 billion from $14.083 billion in December 2001. The decline is less than the previous slide but the trend was not reversed.
Furthermore, any improvement in tourism is threatened by the prospect of a war in Iraq. The inability of Egyptian business to increase exports is also still a chronic problem. In short, nothing can be guaranteed in the foreign exchange markets without a real and substantial improvement in Egypt's wider economy.
By Wael Gamal
