Dollar-denominated depression
The latest foreign exchange rate regime, while hailed by the World Bank and the IMF, is less than popular with most Egyptians. Yasmine El-Rashidi follows the downward trajectory of the pound and the victims left in its wake
While Egyptian economic debate has seen a myriad of issues come and go since independence, the foreign exchange rate has been constantly discussed as a means to stimulate development, particularly during the Mubarak presidency.
"The exchange rate policy has been a subject of intensive debate in Egypt for years," said Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES) at a recent lecture.
The government of Gamal Abdel- Nasser (1952-70) exercised strict control over foreign exchange in the country. Under a system of multiple exchange rates, those Egyptians wealthy enough to be travelling abroad paid a hefty five pounds to the dollar.
During the rule of Anwar El-Sadat and the first decade under President Hosni Mubarak, multiple foreign exchange rates were still allowed in the market. In 1991, under IMF and World Bank guidance, the government eliminated multiplicity and fixed a single exchange rate, though a black market continued to be -- with the shortage of dollars in banks -- the only option for many Egyptians seeking dollars.
For almost a decade the situation remained seemingly stable -- the pound standing firmly at LE3.4 to the dollar. But at the beginning of 2001, the official peg was loosened, making the exchange rate slowly climb to LE4.65 over the next two years.
On 28 January 2003, Prime Minister Atef Ebeid delivered the surprise news that the pound was to be floated. "In foreign exchange, beginning tomorrow, there is a free market where the rate is set by the market. There will be no interference from the government -- it is a free market," Ebeid announced.
Central Bank of Egypt (CBE) governor Mahmoud Abul-Oyoun explained the basic principles of the decision to the public -- an average rate is determined by the compilation of all official forex transactions, with that figure then transmitted to the Customs Authority. "The cornerstone of a successful introduction of a smart monetary policy," he told the press, "is a free exchange rate."
If successful liberalisation is a long- term strategy, then perhaps it is to be expected that Egypt's economic condition gets worse before it gets better. On the day after Ebeid's announcement, the Egyptian pound varied from LE5.30 to LE5.45 to the dollar -- more than 15 per cent weaker than the lowest previously permitted rate of LE4.65, and a 57 per cent drop from the January 2001 rate of LE3.40. The weighted average bid/offer rates were LE5.36 and LE5.43, respectively. This is compared to a black market rate of LE5.35-5.38 to the dollar the day before the announcement of the currency float.
While the first few days saw some cause of hope, with many traders selling off their dollar holdings, the dollar supply dried up quickly as the spectre of war in Iraq became seemingly inevitable.
Over six months later, the pound has depreciated by 25 per cent from its January value, and the black market is flourishing, defying government predictions that it would vanish with the floatation.
For two days, there was a glimmer of hope, as news of the retreat of the dollar in the black market caused a flurry of excitement. In the third week of October, the dollar had dropped from LE6.80 to LE6.60.
The situation, however, was short- lived -- the depreciation was soon back on track. By the end of that week, the rate was back at LE6.75 to LE6.80.
"We thought [the temporary rise in the value of the pound] was a present from God for Ramadan," laughs a government employee buying yamish (dried fruits) in Boulaq. "I can't understand what's happening in the country anymore."
The public is weary of the new exchange rate regime, unsure of what is to come and sceptical that liberalisation measures will resuscitate the economy. Meanwhile, the lower and middle classes in Egypt are feeling the bite of rising prices triggered by the floatation.
"[Policy makers] do not realise what a 25 piastre increase in the price of a metro ticket means to us. It makes a big difference. When everything goes up 25 piastres, but our wages stay the same, we become relatively poorer. The people at the top don't feel this," says Om Ali, a housewife and mother, whose family will have to spend roughly an extra LE25 a month, out of an income of LE500, due to fare increases.
"They said it would not go more than five pounds [to the dollar]," says taxi driver Mohamed Shaker. "Then they said it would never go higher than six pounds. Then it went to just above seven pounds. But they said it would never get that high and they had taken measures to make sure it wouldn't."
The government, backing off from its vow to let the market determine the exchange rate, has initiated several measures to try to force dollars into the banks. These include Decree 506 -- which stipulates that exporters and travel companies relinquish 75 per cent of their foreign currency revenues at the official dollar rate (LE6.13) to banks. Instead of increasing the liquidity of the dollar market, however, it has given companies an incentive to keep their dollars outside of Egypt. As a result, back in September the exchange rate briefly shot up to LE7.30, an unprecedented high.
As if that weren't enough, the dollar itself has been falling relative to other major foreign currencies, leaving euros or yen even more expensive for those earning Egyptian pounds.
A common coffeehouse analysis of the situation is that the government is wasting its money on extravagant projects of little use to most Egyptians, instead of sufficiently cushioning the most vulnerable Egyptians from the effects of devaluation. Billions of pounds have been spent on projects such as the industrial cities, a new tunnel in Heliopolis to fight traffic jams and the Toshka land reclamation project, but budgetary difficulties mean the current level of subsidisation is proving insufficient to keep even the price of bread down.
"We are told that measures are being taken and the government is taking steps to strengthen our economy," Mohamed Salah, a coffeehouse employee, said. "But who's feeling it?"
Al-Ahram Weekly Online : 6 - 12 November 2003 (Issue No. 663)
Located at: http://weekly.ahram.org.eg/2003/663/ec3.htm