For the first time in four years, bankers are confident about the Egyptian pound holding its ground against further depreciation. Niveen Wahish reports For years, the Egyptian pounds slippery slide against the dollar has been making headlines. As the pound depreciated by a little over 80 per cent between 2000and 2004, a multitude of reasons were provided for the unprecedented lows: an official devaluation; an especially volatile black market; a government-mandated free float in January 2003. Today, the pound versus dollar exchange rate is in the headlines again, but for a different reason. For a while now, the pound has actually been stable against the dollar at LE6.25. That stability has been attributed, among other things, to the dollar inter-bank mechanism that came into operation a little over a month ago. The much awaited, much delayed mechanism allows banks to better manage their hard currency liquidity by enabling them to borrow and lend on a real time basis. Because it allows a bank with a dollar surplus to lend to another bank suffering from a dollar shortage, the system oversteps speculators, said Aly Fayez, director of the Federation of Egyptian Banks. Rather than revert to the black market for their needs, banks support each other to meet their dollar commitments. Banks were still able to borrow from each other before, but now according to EFG- Hermes senior economist Hany Genena the advantage of this mechanism is that it provides a real time, across the board picture, of where dollars may be available, as well as the best price to acquire them. This is a more transparent process, he said. It is also an indicator for the Central Bank of Egypt (CBE), allowing it across the board monitoring of the pounds value. It helps alerts when the whole system may be up against a serious problem, or if just one or two banks need help. Although it is not a solution in itself, Genena said, it helps set the equilibrium price between supply and demand. Around 20 banks are now part of this mechanism. Still not everyone is optimistic. BNP Paribas general manager treasurer Shahinaz Foda said the system was meaningless; working only when there is excess hard currency liquidity in the market, as is the case now. If there is a shortage of hard currency, she said, no bank would be offering to lend their dollars, choosing instead to reserve them to meet their clients needs. A similar system was in place in the early 1990s, she said, but it became obsolete once the exchange rate was fixed. In any case, the pounds recent stability vis-�-vis the dollar has been a cause of relief. Fayez said it showed the CBEs professionalism in managing the market with its monetary policy. Continuous withdrawal of excess Egyptian pound liquidity from the market by selling treasury bills and bonds is among the monetary policy tools used by the CBE. Excess Egyptian pound liquidity is often used for speculative purposes. Over the past couple of years, liquidity in Egyptian banks has reached unprecedented heights, due to banks reluctance to extend credit, in fear of bad loans. Investors, likewise, have been slow at expanding their businesses due to the slowdown suffered by the economy as a whole. Besides withdrawing liquidity from the banking system, the CBE has also encouraged banks to offer savings certificates with interest rates in the range of 12 per cent. That served, on the one hand, to attract pound savings, and on the other, to catalyse individuals with dollars to exchange them for pounds in order to benefit from the high interest rate. The interest rate on dollar deposits does not exceed three per cent. The bottom line, said Amr Bahaa, general manager of the Egyptian Commercial Bank (ECB), was that anyone hoarding dollars (and betting on their value increasing) is actually making huge losses. BNPs Foda described the moves timing as particularly clever, considering that it came ahead of Septembers customs duties cuts, thus providing banks a head start on any possible influx of demand to open letters of credit for importers. In the end, that influx never actually came through. Importers may either be expecting further customs cuts, said Bahaa, or are aware that the publics purchasing power is limited. However, it was also a negative indicator at the same time. If no capital goods are being imported, it means that new investments are not being pumped into the economy, Bahaa said. Foda also attributed the exchange rate stability to the fictitious speculation that brought the pound, at one point, to over LE7. Speculation is short lived, she said, rather than a real reflection of supply and demand. An attempt is also being made to preempt potential hard currency runs in the lead up the upcoming pilgrimage season. To prevent speculation, banks have announced their readiness to provide each pilgrim with up to 2,000 Saudi Arabian riyals. That, hopefully, will mean that not even the Hajj season will see the usual dollar scarcity and its accompanying rate hike. In fact, Bahaa believes the price will go down. We are not getting much demand for those 2,000 riyals. People are going for cheaper dollars on the black market. When there is a surplus of hard currency, he said, speculators end up dumping their dollars on the black market. Fayez said that even if the rate were to rise slightly as a result of such seasonal reasons, it was bound to drop again. People have become used to the exchange rate being fixed, and that is wrong, he said. The administrative interventions to hold the pound steady were counterproductive in the past, and in fact nurtured the black market, allowing for harsher speculation. Now the different policies being implemented are pressuring speculators to abandon dollars to cut their losses. To sustain this stability, both Foda and Bahaa stressed the need to speed up the privatisation process, and attract more foreign direct investments. Such flows are needed because the high interest rate on saving certificates is a short-term procedure. Eventually, said Foda, rates could drop to around 9.5 per cent, which would still be attractive, but not enough to convert the needed dollar resources. What we need, Fayez said, is a dynamic where the dollar is no longer considered a value retainer and the only way that can happen is by lowering inflation and boosting growth rates.
