Looking at liberalisation
Egypt's new exchange rate regime continues to be a highly controversial subject. Niveen Wahish reviews two recently released studies on the issue
People are still finding it difficult to adapt to the flexible exchange rate regime even though it was initiated by Prime Minister Atef Ebeid almost two months ago. Given this, two recently released studies have striven to analyse the new system and recommend ways of making the most of it.
The first is a policy paper by the Egyptian Centre for Economic Studies (ECES) written by Ahmed Galal, its executive director.
Galal stresses that there must be no going back on this system. "For the Egyptian economy, the loss of credibility resulting from [foreign exchange] regime reversal is too high."
Galal makes it clear that it is too early to assess the impact of the pound's floatation and its effect on inflation, output and trade, at the outset. He notes that the pound's depreciation has been within a 20 per cent range, which he attributes to the fact that the pound had already been devalued by over 30 per cent during 2001-2002. However, he also attributed the modest depreciation to the fact that the foreign exchange regime, "does not seem to be working well yet".
To rectify the situation, Galal suggests a market-based approach. He stresses the need to make it attractive for market participants to surrender their proceeds through official channels. This would be done by allowing the rate to float with minimum restrictions, and indirect intervention through the use of reserves, privatisation or borrowing from abroad in case of war in Iraq. He also stresses that "overshooting" of the currency should not be a major concern. "Overshooting, accompanied by higher interest rates has been a common feature of countries that have shifted from a fixed to a flexible exchange rate regime." This phenomenon is temporary, he said, and readjustment takes place as, "market players feel the exchange rate reflects economic fundamentals."
Galal hopes that, beyond the measures required for the short-term, the Central Bank of Egypt (CBE) needs to translate its vision for monetary policy into reality by choosing a specific nominal anchor, and working on strengthening the institutional capacity of the CBE.
A second study was issued by Al- Ahram's Centre for Political and Strategic Studies and prepared by Abdel- Fatah El-Gebali, head of the centre's economic research unit. It reviews the nature of Egypt's foreign exchange market and its development over the last century.
El-Gebali states that the government intended to liberalise the foreign exchange market and not to float the pound, as some believed. "The aim of this [policy] is to reach a realistic value of the pound, encourage exports, limit imports and enable the banking system to play an active role as a legal and legitimate channel in the foreign exchange market," says the study.
Although the system has theoretically removed all restrictions, El-Gebali points out that it has not yet been able to solve the problem of long-term monetary stability. What is happening in the foreign exchange market now, he writes, can be attributed to structural elements in the national economy, such as the status of the balance of payments and monetary policy.
There are many positive sides to the liberalisation of the foreign exchange regime, primarily the reinstating of order in the market. However, for the new policy to bear fruit, the study says, a number of procedures must be adopted. These must not be solely focussed on tackling the negative effects of liberalisation, rather they must serve to support the national economy as a whole. The economic policies of the country must be made more efficient, increasing the income from exports, attracting foreign direct investment and increasing savings levels.
Boosting the country's growth rate and creating employment requires an increase in stable investments and a more efficient use of unutilised capacity. El- Gebali also stresses the importance of the role of capital markets in mobilising savings.
The right level for the exchange rate can only be determined through its interaction with other variables, which are not all affected by the exchange rate alone, but by government policies more generally.
El-Gebali says that moving to a stage where growth and employment rates increase requires better utilisation of capacity and the organisational and institutional restructuring of the Egyptian economy. The final goal of the production process is to raise growth rates, which would lead to better living standards.
Al-Ahram Weekly Online : 20 - 26 March 2003 (Issue No. 630)
Located at: http://weekly.ahram.org.eg/2003/630/ec4.htm