Al-Ahram Weekly Online   8 - 14 May 2008
Issue No. 896
Published in Cairo by AL-AHRAM established in 1875

Mixed blessing

The dollar has lost ground against major currencies. Rehab El-Sayed investigates how this is affecting the local economy

Being the main international reserve currency, with an accumulation of more than double that of the euro, any fluctuation in the value of the green backs shakes economies around the globe. The dollar's slide began last summer with the crisis in the US mortgage industry, and intensified in the last quarter of 2007 as warnings about a US recession became more obvious. This, accompanied by ballooning US trade and budget deficits, sent the dollar south to record lows against the euro and other major currencies.

A weak dollar resonates in the entire global economy by holding it back and creating worldwide recession. At the same time, the economic development of emerging markets such as China and India is motivated by foreign demand, either from the US or countries which export to the US. For example, Canadian corporations exporting to the US suffered many misfortunes during 2008 due to the weak dollar. Meanwhile, European economies have not fared well either since they are selling fewer exports at high prices on account of the rise in the value of the euro against the dollar.

The effect of the dollar's drop on the local economy is mixed. When the US Federal Reserve reduced interest rates on the dollar, Egyptian banks followed suit by lowering rates to around 4-5 per cent. At the same time, the Central Bank of Egypt (CBE) increased its main interest rates on the pound twice since the beginning of the year in an attempt to alleviate the impact of inflation on Egyptians.

Ahmed Ismail, regional manager of the National Bank of Abu Dhabi, believes this widens the interest rate disparity between the two currencies in favour of the pound. "Consequently, a considerable number of depositors who previously regarded possessing US dollars as an investment because of its constant rise compared to the Egyptian pound transferred their dollar deposits into Egyptian pounds," revealed Ismail. He added that Egyptians are also induced by the stability of their local currency and the dollar's devaluation.

Some who wanted to trade up rushed to sell their dollars at banks or currency exchange offices. Ahmed Farag Abdel- Samie, owner of one such exchange office, noted that the deteriorating value of the dollar generated an increased supply of dollars and a parallel increase in demand on the pound. Abdel-Samie stated that there is a belief among dealers and market analysts that the pound will appreciate more in the future, resulting in lower inflation, lower interest rates and a stronger fiscal performance.

There have always been fears about the appeal of Egyptian exports in international markets in light of the depreciation of the dollar against the pound. Another shortcoming is the possible retreat in the value of Egypt's international foreign reserves of $32 billion, mainly denominated in dollars, according to Adel Mohamed Khalil, World Trade Organisation advisor to the Arab Council of Economic Integration.

However, the dollar's freefall can be a mixed blessing since Egypt's import bill from the US -- as well as other countries whose currencies are pegged to the dollar -- will partly drop. This is provided that prices here are determined according to effective market mechanisms, and not trader greed, noted Khalil.

Nevertheless, Abdel-Sattar Eshra, secretary-general of the Egyptian Federation of Chambers of Commerce (EFCC) pointed out that the gains from a lower import bill are limited. "Egypt imports only wheat and arms from the US," Eshra explained. "The rest is mainly form Europe, Japan and China whose currencies have surged against the dollar. This is translated onto the Egyptian market as soaring prices of goods."

Mohamed Fahmi, economic analyst at one of Egypt's leading investment banks, agrees. "The local economy, as well as others worldwide, are not at risk of being turned upside down by the decline in the dollar since there are other factors counterbalancing its effects," stated Fahmi. He explained that the price of oil, for example, has an adverse relationship with the dollar, which means that the value of oil exports is on the rise. Fahmi also stressed that eventually the US will intervene to restore the value of its currency, and save its economic partners around the world.

As for the tourism sector, which is one of Egypt's main sources of hard currency and thus is always considered the hardest hit by rate fluctuations, the sense is mildly negative. Fathi Anwar, chairman of the Egyptian Hotel Association, pointed out that "fortunately 80 per cent of hotel reservations are in euros, consequently the surge in the euro compensates for the dollar drop and spares hotels tremendous losses." Anwar added that the higher exchange rate of the euro against the dollar and most Arab currencies reflected positively on the flow of tourists -- especially from the Arabian Gulf countries to Jordan, Egypt, Lebanon and Dubai -- since Europe has become 30 per cent more expensive.

Similarly, with more than 98 per cent of companies listed on the Egyptian stock exchange being traded in Egyptian pounds, and only two per cent traded in dollars, the effect of the dollar depreciation on the local transactions is not felt.

Faika El-Refaai, former deputy governor of CBE, argued that the best way to hedge against the dollar was first recommended in 2000, by pegging the Egyptian pound to a basket of currencies belonging to the countries it has trade relations with or is indebted to. Egypt's trade with the US accounts for 25.2 per cent of its entire exports, 27 per cent with the EU, 7.4 per cent with the UK and 40.4 per cent with the rest of the world.

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