Disputable manoeuvres
More export dollars in the banks may support the pound, but, Niveen Wahish finds the market wary of a rebound
Just as the announcement to float the pound took the market by surprise last January, so did the decision obligating exporters to deposit their foreign currency earnings in Egyptian banks and exchanging 75 per cent of it into local currency at the official rate.
A few weeks ago, government officials and bankers were fiercely campaigning to convince exporters to exchange their dollars through the banking system. At the time, a decision by the minister of tourism obligated tourist companies to exchange 75 per cent of their earnings at banks, but exporters were left to make the decision voluntarily.
The government's decision is aimed at making more forex available to the banking sector to enable it to finance imports and enhance dollar liquidity.
Banking experts believe the move will increase dollar supply, thereby boosting the value of the pound. One banker, who spoke on condition of anonymity, said that while exporters' revenues have not yet begun to flow through the banking system, those of the tourism sector have, and are beginning to boost the pound's value. Prime Minister Atef Ebeid was quoted earlier this week as saying that an unprecedented $65 million was delivered to local banks on a single day during the week.
The promise of increased availability has led to a somewhat stable pound, particularly in the unofficial market. Last week it closed at around LE5.7 in banks and hovered at around LE6.2 on the black market, compared to LE6.7 just a few weeks ago.
The decision, the banker believes, will render dollars more available. He is hopeful that as people see the pound holding its ground and possibly gaining value against the dollar, dollar hoarders will be inclined to sell for a profit. Meanwhile, those who bought dollars at the higher rate will want to sell to cut their losses.
"As the dollars become readily available, people will regain confidence in the system," he said. "This was a sound decision that had to be made."
Not everyone agrees with this logic. One economist, who also preferred to remain anonymous, said the decision to force exporters to submit their foreign currency earnings to banks "gives the impression that the Egyptian economy is in a much worse state than we had been led to believe". She questioned the need to make the act obligatory when exporters had expressed their willingness to cooperate.
Sources at Citibank Egypt, part of the US- based global financial group, said the bank's senior managers believe this regulation would be a good idea if two conditions were met. First, it has to be temporary, that is, "a stop- gap measure". And second, exchange rates quoted by banks should be "truly competitive". Otherwise, the bank's senior managers think "any additional restrictions are not recommendable".
But, as a source from the international financial sector put it, "since they did not place a time frame for it, one would assume that it is here to stay."
"The market needs less controls, not more," he said, adding that the decision may serve government purposes in the short-term, but not in the long-run. "Experience shows that market players find ways of side-stepping unnecessary regulations," he said.
Meanwhile, the move negates the government's announced policy to liberalise all currency exchange transactions. "The decision does not help boost the public's long-lost confidence in government announcements," he said.
Another banker who supports the decision admits that it annuls the freedom that should accompany the floatation. But he said he has come to see that the decision to float "was obviously made on a whim", and that the market was not prepared for it. Just before the floatation, the CBE was encouraging banks to cut interest rates. "Interest rates should have been high at the time of the floatation announcement so that the interest rate differential would encourage individuals to hold on to their pounds."
Furthermore, the decision was made at a time when a war was looming in the region and hard currency earnings were expected to drop.
Before the floatation, the CBE should have made sure it had all possible dollar demand covered, but instead, the bank did not want to use its foreign reserves for that purpose. The government would have also done well to first secure funds from donor agencies to support the demand on dollars.
As tourism companies and exporters adapt to the government's decision, the big question now is: Who is next? Banking sources said there has been a detectable trend by small savers to pull their dollar deposits out of bank for fear that they would be forced to relinquish them too.
