Pound on the rebound
Just a year since its flotation and subsequent downfall, things may finally be looking up for the pound, writes Niveen Wahish
For the last couple of months, the pound/dollar exchange market has been uneventful. Although a black market persisted, the value of the pound on the black market did not surpass LE7, with the official rate remaining LE6.15 all the while. Even during the Hajj season, when demand by pilgrims for the hard currency often triggers the black market price to skyrocket, as has been the case the past two years, the pound continued to trade at the same levels.
But lately, things have taken a turn for the better. The price on the black market began dropping to reach just below LE6.50, not too far off from the official rate. All the better for the new Central Bank of Egypt (CBE) governor, Farouk El-Okda, who took office just over three months ago vowing to solve the pound's problems. "Our objective is very clear -- that we are going to unify the exchange rate," he said at a press conference last week.
It is not clear, however, how El-Okda intends to turn his dream into reality. The CBE's role in reigning in the rate of the dollar has been the subject of much speculation lately. El-Okda's appointment followed by the appointment of a new board of directors for the CBE, which had been without a board for a few months, had stirred hope that the deteriorating condition of the pound could be dealt with. While some observers believe that it is too early to chalk up the improved value of the pound to the new governor and his board of directors, others believe that the new CBE management has already made a difference.
"El-Okda has been very taciturn about his plans", said Waleid Gamal Eddin, part-time instructor at the American University in Cairo, adding "that in itself has been a blessing in disguise." He explained that El- Okda's lack of statements about monetary policy has prevented would-be speculators from knowing which way the pound was heading, thus slowing down their activities. Moreover, the fact that 2,000 Saudi riyals were made available for each pilgrim through the banking system eased demand on the black market. This came as a huge disappointment to speculators who had bought the dollars earlier hoping to sell them at high prices during the Hajj season.
In the meantime a number of other circumstances have also worked in favour of the pound's value. For starters, the country's major foreign currency earners are performing well. The year 2003 saw a record 6.4 million tourists visit Egypt, compared to 5.5 million in 2000, which itself was a peak year. Suez Canal revenues have been thriving, reaching $243.9 million in January 2004 compared to $190.8 million the year before, according to Cabinet Information and Decision Support Centre figures. Exports reached $2.23 billion during the first quarter of 2003/04 compared to $1.82 billion same time the year before.
The pound was bolstered further by a reduction in imports, particularly of consumer goods which fell from $2.78 billion in 2001/02 down to $2.59 billion in 2002/03. Safaa Safwan, head of international transactions at Suez Canal Bank says that the size of letters of credit imports is no longer what it used to be. "People are importing only what is really necessary particularly with the state of recession that we are witnessing and with the increased prices," she said.
Mohamed El-Abyad, head of the foreign exchange bureaus division in the Federation of Chambers of Commerce, attributed the improved value of the pound on the black market to banks covering letters of credit more readily. "As long as banks meet demand, no one needs to look for dollars on the street," he said. Previously, the inability of banks to provide the hard currency needed to open letters of credit forced importers to search for the hard currency on the black market.
For Gamal Eddin, this may mean that the CBE might have discreetly injected hard currency into the banking system from the country's reserves. Reserves were often reverted to in the past to ease the backlog in hard currency demand. But observers have often noted that this intervention, to succeed, needs to have an element of surprise.
The CBE has also continued its tight monetary policy whereby the money circulating is just enough for the financial sector. It sucked excess pound liquidity from the market by calling for deposit auctions whereby banks deposit Egyptian pounds with the CBE in return for an interest rate. This prevents banks from speculating on the pound as they have no excess liquidity to buy dollars.
Another factor which could have helped put the market back on track is the measures taken by banks to ensure abidance by the Anti Money- Laundering Law. These efforts finally bore fruit in late February when Egypt was lifted off the blacklist of countries that fail to counter money laundering.
Safwan of the Suez Canal Bank explained that strict application of this law meant that large amounts of cash would not be accepted by banks unless their source was identified. This factor discourages individuals from buying dollars off the black market since they cannot prove where they got the money.
And further improvement maybe on the way. Gamal Eddin is optimistic that in a period of six months to a year, Egypt's gas exports will start flowing which will mean more hard currency revenue. Also with summer a few months away, incoming Arab tourists will mean more dollars. "Speculators will try to cut their losses by opting to sell now rather than wait when the price falls further," he predicted.