A delicate balance
By
Ahmed El-Sayed El-Naggar
The decision to free the exchange rate was badly timed, occurring when Egypt maintains a severe deficit in trade and services, with a weak tourism sector, shrinking remittances by expatriate Egyptian workers, and the strong demand for foreign currency, associated with the Hajj season. That expected oil prices collapse in the aftermath of a US attack on Iraq compounds the problem.
Not that the Egyptian currency market could have carried on for much longer divided between official and black market dealings. Foreign currency withdrawn from the Central Bank at the official exchange rate leaked onto the black market, reaping huge (and criminal) profits at the expense of ordinary Egyptians.
The floatation of the Egyptian pound is intended to reduce imports and boost exports. The first goal is dependent on our ablility to do without imported goods, or locally produce alternatives; the second on our ablility to produce competitively priced goods for which there is a demand. The decision should boost foreign investment incentives as well as tourism. Increasing foreign investment, equally requires a raft of complementary measures, including greater transparency, less corruption, and the removal of bureaucratic obstacles.
Prices of imported commodities, staple products such as wheat, flour, sugar and vegetable oil will increase. To stabilise the price of such commodities subsidies will have to be increased, leading to a larger budget deficit. It also devalues the savings of the middle classes. Rates of saving are likely, as a result, to decrease, while a preference to save in foreign currencies will be boosted, damaging the value of the pound for a long time to come.
This week's Soapbox speaker is an economic affairs expert at Al-Ahram Centre for Political and Strategic Studies.
