Frustration over forex
Who wants to hear about Pakistan? Sherine Abdel-Razek listened to angry participants at a recent seminar on the government's foreign exchange policy
A seminar aimed at comparing the currency floatation experiences of Egypt and Pakistan was transformed into a heated debate over the success of Egypt's three- month-old floating exchange rate policy. Indeed, participants at the seminar entitled "Foreign exchange regime liberalisation in Egypt and Pakistan", seemed to be too frustrated to hear about another country's case study.
At the seminar, which was organised by the Egyptian Centre for Economic Studies last week, participants voiced worries and frustration that the new exchange rate regime had so far failed to solve the problems of the market for foreign exchange (forex), which included a scarcity in the availability of dollars and a rapidly depreciating pound.
"What are we going to learn from Pakistan? Each country has its own circumstances," a female banker said sarcastically to a group of journalists and businessmen sitting around her. However, the Pakistani experience, as presented by Mohammad Hanif Akhai, former member of the State Bank of Pakistan, the Pakistani central bank, captured the audience's full attention, at least until the end of his presentation.
Pakistan liberalised its exchange rate in 1998. In the five years since then, it has applied a multi- exchange rate regime, then left its currency to float against the dollar within a fixed band. Finally, after the failure of these measures, it floated its currency.
Sounds familiar? This is very similar to the Egyptian experience, which started with a two-tiered exchange system and ended with a complete floatation last January. However, speakers agreed that Egypt is in a much better position than Pakistan was five years ago.
Pakistan floated its currency in the face of a balance of payments crisis and heightened economic uncertainty in the aftermath of its nuclear tests. In July 1998, Pakistan's foreign reserves had dwindled to a mere $415 billion and foreign debt amounted to 60 per cent of Gross Domestic Product (GDP). Additionally, it was building up substantial arrears on debt servicing and other forex obligations.
This makes Pakistan's case substantially different from that of Egypt, according to Mahmoud Abul-Oyoun, governor of the Central Bank of Egypt (CBE). "We started with a good level of foreign reserves, that is $14.38 billion. Also, our foreign debt stands at $28.1 billion, around 30 per cent of GDP, with annual instalments of $1.4 billion being regularly repaid," he said.
In further support of the floatation decision, Abul-Oyoun also revealed that the current account surplus stood at $143 million and the balance of payments surplus at $152 million during the six month period ending December 2002.
The rest of Abul- Oyoun's presentation and the two-and-half hour seminar concentrated solely on the state of the Egyptian forex regime.
He also stated that the pound had only lost 8.86 per cent of its value since floatation. To date, he said, exporters and tourism agencies had injected some $1.1 billion into the economy.
However, Abul- Oyoun's upbeat statement was met with little agreement and much opposition.
"The surplus in the balance of payments is mainly due to a decline in imports as a result of recession over the last two years," said former economy minister, Mustafa El Said. "We have to be aware that, in light of such an actual deficit in the balance of payments, we could not achieve a successful floatation without facing higher inflation rates," he added.
Another economist, Alia El- Mahdi of Cairo University, questioned the depreciation figure of eight per cent quoted by the CBE governor.
"The real decline in the pound's value is much higher than the figure quoted by the CBE governor," El-Mahdi said. "We as economists are good at playing with figures, but we all know that just a few days before the floatation the CBE increased the official rate from LE4.68 to LE5.68. It is not true that the decline is only eight per cent."
In the face of this strong criticism, the CBE governor admitted to the difficulties associated with the new system.
"It is not fair to judge the system after only three months," Abul- Oyoun said. "I admit that the system was not successfully operated in the beginning due to agreements between banks on prices and margins which totally contradict free market principles. We are now trying to intervene to dismantle these agreements. We are also working on a reporting system in which all forex transactions by authorised money dealers will be registered in the electronic records of the CBE."
The executive director of ECES, Ahmed Galal, said that the new system is still not working very well but seems to have potential. He added that, theoretically speaking, the success of a floatation depends on a healthy relationship between exchange rates, interest rates and foreign reserves.
Galal hopes that the recent increase in interest rates, combined with the positive effect on foreign reserves of a pending World Bank loan, will help decrease pressure on the exchange rate and enable the pound to gain ground.
In one of the few references to the Pakistani experience, Galal pointed out that the CBE could play a similar role to the State Bank of Pakistan, which bought dollars from authorised money dealers at the official rate and injected it into the inter-bank market at a lower rate, thereby making dollars more available, and bringing forex rates down.
Galal's second pillar for a successful forex regime echoed the views of most of those present: "The forex regime will never succeed unless participants feel that it is working in their interest," Galal said. He was referring to a controversial new CBE policy that expected exporters and tourism companies to relinquish 75 per cent of their dollar earnings to local banks. Galal said that quite simply this policy was inconsistent with the fundamental economic laws of supply and demand.
Al-Ahram Weekly Online : 24 - 30 April 2003 (Issue No. 635)
Located at: http://weekly.ahram.org.eg/2003/635/ec2.htm