Pound gaining ground
The pound is bouncing back amid news of a prospective World Bank loan. Sherine Abdel-Razek reports
For the first time in the five weeks since its floatation, the Egyptian pound is showing signs of strength. The pound was trading at around LE5.66 against the dollar at the beginning of this week, compared with a central bank calculated weighted average of LE5.62 last week. Moreover, its price in the unofficial market ranged between LE5.70 and LE5.90, down from more than LE7 the previous week.
The revival started soon after Prime Minister Atef Ebeid announced that Egypt would be receiving a $1 billion policy-based loan from the World Bank (WB). While the first tranche of the loan will not be disbursed for another two or three months, news of the loan, according to bankers, has helped ease pressure on the pound and lessened demand for dollars in the local market. This was reflected in the pound gaining some ground after losing more than 20 per cent of its value since floatation on 28 January.
Another factor has also helped. According to Khaled Abu-Heif, director of institutional sales and trading at the Commercial International Brokerage Company (CIBC), an increase in interest rates on pound deposits (they now stand at around 11 per cent) has encouraged Egyptians to hold on to their currency. Additionally, banks are now refusing dollar deposits as collateral for granting loans denominated in Egyptian pounds.
Moreover, "speculators panicked when they saw the dollar exchange rate dropping 30 piastres in one day, so they started to liquidate their [dollar] positions. This weighed down on its price in both the formal and informal market. The new exchange rate mechanism is finally starting to work," said Abu-Heif.
Other changes aimed at supporting the new exchange rate policy are also underway. The Federation of Egyptian Banks, in cooperation with the Central Bank of Egypt (CBE), is establishing a new system whereby banks can borrow dollars from each other at an interbank rate. The four public banks as well as the Commercial International Bank (CIB) and the Egyptian American Bank (EAB) will be participating in this system.
Analysts agree that a real improvement in the Egyptian pound's position will be more noticeable in a few months time, when the new system is expected to bear fruit. These expectations might be further consolidated when the first tranche of the World Bank loan (expected to be between $200-300 million) is disbursed.
Jamal El-Kibbi, deputy WB representative in Cairo, was quoted by Associated Press (AP) as saying that another sizeable chunk will be made available in six months time so that the whole $1 billion will be disbursed within one year.
However, the process of disbursing the loan is not as simple as it sounds. WB loans are usually linked to changes in economic policies in order to guarantee the government's repayment. And although the WB's delegation that held negotiations with the Egyptian prime minister has already left, other technical teams will start visiting Egypt during the coming months to identify areas that need reform.
So far neither the use of the loan nor the new reforms needed to receive it have been revealed. "All these things are still under discussion. According to the WB's strategy, delegations first agree with governments on certain economic policies to be implemented and then the prescribed measures are discussed with the bank's board which will then give its approval," explained Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES). Nevertheless, he added, "I do not think this will take a long time as there is a collective interest to reform among all the concerned parties."
Galal believes that the WB's prescribed policies will be related to improving Egypt's business environment in order to make it more attractive to foreign investment and reform of the banking sector. An attempt will also be made to minimise the negative social impact of these policies.
Other anonymous WB sources have been quoted as saying that Egypt might also need to reform its water and electricity utilities forming independent economic authorities. "This would mean that the national budget would give a clearer image of the local economy," said Galal.
The government budget currently includes, among other things, the budgets of these public entities, government banks and the National Investment Bank.
It was initially reported that a part of the WB loan will be made available to the CBE as a cash injection for the banking sector to help cover increasing demand for dollars. While a WB official contacted by Al-Ahram Weekly declined to comment on this, market experts disagree on the viability of such a step.
"This will be a temporary solution for the dollar problem, however large the injection is. The problem will start to appear again. We have to increase our dollar resources while tightening the demand for unnecessary imports," Abu-Heif said.
Galal of ECES sees it differently "the way the funds are used is not terribly important. At the end of the day there is more foreign currency in a certain part of the system and this will decrease the pressure on the pound."
However, economists rule out the government using the loan to cover the shortage in foreign exchange. It is the International Monetary Fund's (IMF) not the WB's role to provide quick disbursement funds to governments in times of need.
The IMF's representative in Cairo, Nadeem El-Haque, was recently quoted as saying that the IMF is willing to help Egypt in case it has a shortage of available hard currency. According to El-Haque, this is not the case at present. It still has foreign currency revenues to cover its needs.