Tuesday,12 December, 2017
Current issue | Issue 1254, (9 - 22 July 2015)
Tuesday,12 December, 2017
Issue 1254, (9 - 22 July 2015)

Ahram Weekly

Pound jitters

Mona El-Fiqi examines the repercussions of this week’s slide in the value of the pound

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Chart1
Al-Ahram Weekly

For the second time this year, the Central Bank of Egypt (CBE) has allowed the Egyptian pound to fall against the dollar.
 
The pound has lost LE0.20 since Thursday against the US currency, and on Sunday the CBE sold $36.6 million in an auction at a cut-off rate of LE7.73 to the dollar.
 
On Thursday at another auction the dollar had sold at LE7.63. Prior to this move, the pound had been steady at LE7.53 since February, when it lost around five per cent compared to its end of 2014 rates.
 
Meanwhile, the pound is trading at LE7.83 against the dollar in banks. Since January the CBE has allowed commercial banks to trade dollars at LE0.10 above or below the official rate, with an extra LE0.05 allowed for currency exchange bureaus.
 
The new rate is the lowest since the CBE introduced an auction system in December 2012 three times per week to manage its limited foreign reserves.

The reserves ranged around $15 billion during the last two years compared to $36 billion before the Revolution. The figure increased to $20 in June thanks to Gulf deposits. The depreciation of the pound has been received with gloom by commentators. “It means a 2.5 per cent increase in the imports bill,” said Tarek Hassanein, head of the Cereals Division at the Federation of Egyptian Industries.
 
With essential products such as fuel and food staples representing the bulk of Egypt’s imports, the depreciation is bound to lead to increased prices. Egypt imports four million tons of cereals annually at a cost of LE10 billion. In 2014, Egypt’s imports reached $64 billion, a 15 per cent increase from a year earlier, according to CBE figures.

“The inflation rate is already high, standing currently at 13 per cent compared to five to six per cent four years ago,” said Jasmine Fouad, a professor of economics at Cairo University.

To mitigate against the fall she called upon the government to take action to control prices to protect consumers from greedy traders, importers and producers.

She said it would be unfair to expect consumers to absorb the increases in prices, especially since this year they would be unlikely to receive the usual 10 per cent annual bonus. Citizens should be warned ahead of time of austerity measures and given a clear time frame for their application, she said.  
 
However, Fouad also saw the advantages of a depreciation, which could help boost exports and encourage investors.
 
“The devaluation of the pound could attract international investors as well as the private sector as it will increase their products’ competitiveness in both the local and international markets,” she said.
 
Investors are reluctant to tap markets where foreign currency is not readily available, and there has been a threat of a possible sudden devaluation. Fouad said that the government was trying to rebuild the economy after four years of turmoil with a series of investor-friendly reforms, including reducing subsidies and introducing pro-business regulations.

However, the difference in the exchange rate would not encourage investors to do business in Egypt as long as the country’s risks were high, said Anwar Al-Naqeeb, a professor of economics at the Al-Sadat Academy for Administrative Sciences.

“This insignificant difference in the exchange rate is not effective compared to other factors that investors need before venturing into new projects in a country,” he said.

He noted that some CBE policies represented a problem for investors. In February, the CBE had decided to cap the amount of dollars that can be deposited in banks to $10,000 per day or $50,000 per month, for example. Although the move was done to control black-market trading, it may stifle business transactions, Al-Naqeeb said.

He believes that as long as the CBE controls the exchange rate, the price of the pound will not reach fair value. “The CBE should no longer intervene to control the exchange rate and leave the value of the pound to be determined by market forces,” he said.

Exporters were happy with the move, however. Mohamed Qassem, chairman of the Exports Council for Ready-Made Garments, said the pound’s devaluation was a necessary step that would have a positive impact over the long term, not only on exporters but also on local manufacturers and farmers.

The latter would have a better chance in the domestic market now that imports would be costlier as a result of the higher exchange rate, he said.

Many countries including India and China have devalued their currencies in the past in order to help their local industries produce and sell at suitable prices, according to Qassem.

Despite the 2.5 per cent depreciation in the value of the pound, Qassem said that it was still not at a fair value against the dollar. Egypt’s dependence on imports coupled with rising inflation usually discourages the government from loosening its grip on the currency, he noted.
 
Qassem explained that the exchange rate was one of the problems that had led to Egyptian exporters losing some of their markets. The volume of Egypt’s exports fell by 22 per cent during the first quarter of this year.

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