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New head, same problems
Published in Al-Ahram Weekly on 28 - 10 - 2015

Almost a month from today the Central Bank of Egypt (CBE) will be getting a new chief, Tarek Amer. He will replace Hisham Ramez, who has been in office for around two-and-a-half years.
The change in CBE leadership comes amidst tough economic conditions characterised by shrinking foreign reserves and a local currency that is losing its value to the dollar. The Egyptian pound has lost 11 per cent of its value since January 2015.
Ramez has come under strong attack in recent months for intervening in the forex market by placing restrictions on dollar cash deposits, a move importers say has limited hard currency availability in Egypt. The restrictions have limited importers' ability to acquire dollars on the black market to open the letters of credit needed for imports.
“The dollar deposit restrictions that former CBE governor Hisham Ramez introduced raised investors' worries and paralysed economic activity. Importers and manufacturers were not able to get their needs of the greenback and investors were not able to repatriate their profits,” said Osama Mourad, chairman of Acumen Holding, a local investment bank.
As a result, a number of foreign companies are considering divesting their assets in Egypt, said Mourad. Talks behind closed doors in foreign chambers of commerce and business associations are full of such stories. “Why would any company invest in a country that puts restrictions on the repatriation of its profits abroad?” Mourad asked.
However, the decisions have made sense for some. “He does not print the dollars, but only manages what he has available,” said one banker who preferred to remain anonymous. What Ramez had done, he explained, was meant to manage what little was left of the country's reserves.
Moreover, the restrictions, the banker said, are regular anti money-laundering procedures that are implemented globally. “Granted, they were implemented at the wrong time. They should have been in place since 2004,” he said.
The CBE has allowed the pound to depreciate three times since the beginning of the year, the latest a couple of weeks ago. The pound now officially trades at LE8.03. “The CBE has chosen a difficult but, categorically appropriate, path that should ensure the restoration of the medium-term equilibrium in the balance of payments,” said Hany Genena, head of research at Pharos Securities, in a recent note.
“Given current resources, the alternative option would have been to administer a ‘mini-recession' to limit the demand for foreign currency. This would have been catastrophic to investor sentiment and corporate operating metrics.”
Egypt's international foreign reserves fell by $1.76 billion in September to $16.33 billion. This is the third consecutive decline, down from the June level of $20.08 billion. Egypt's foreign reserves have been hard hit since the January 2011 Revolution as two of its main hard-currency earners, tourism and foreign direct investment, were affected leading to an increased deficit in the country's external balances.
The foreign currency reserves have been propped up at various stages by generous Gulf support, the latest of which came in deposits made to the CBE in June.
That being the case, the anonymous banker believes there is not much a new CBE governor can do. “Expectations are too high of the new governor. He is tied by economic conditions beyond his control,” he said.
Tarek Amer, the new governor for a four-year term between November 2015 and November 2019, served as deputy governor of the Central Bank between 2003 and 2008. He then headed the National Bank of Egypt (NBE) until 2013, a period during which he turned the NBE's performance around.
Because of the limited dollar resources, observers believe Amer will continue to devalue the pound, particularly since he was part of the CBE team when the pound was devalued in 2003 and his experience in jointly managing a major currency crisis in 2003 with then CBE governor Farouk Al-Okda.
“We expect the ongoing realignment in the exchange rate to continue and most likely at a faster pace,” Genena said.
London-based William Jackson, a senior emerging markets economist at Capital Economics, concurred, saying, “We expect the currency to fall to LE8.25 per dollar by the end of next year, compared with LE8.03 per dollar at present.” He thinks the pound is overvalued.
“The real effective exchange rate is higher than its long-run average, and exports have performed poorly for years, both of which suggest that the currency is not competitively valued,” he said.
Back in 2003, recalls Mourad of Acumen Holding, leaving the pound to move freely against the dollar resulted in the exchange rate declining from more than LE7 to just LE5 per dollar.
Amer, or any other Central Bank governor, can't do this now unless the foreign reserves are higher than the current level, Mourad said. He added, “This makes a loan from international financial institutions such as the World Bank and the IMF inevitable.” The government is currently in negotiations with the World Bank to receive assistance of $3 billion over three years.
“The government's intervention to centrally control the currency's movement is the worst message to send to investors,” believes Hany Tawfik, chairman of the Egyptian Private Equity Association. He pointed out that while the Russian ruble had lost 50 per cent of its value during 2015, the Russian monetary authorities never intervened.
“Delaying the devaluation of the pound is doing us no good after a series of devaluations in emerging markets currencies in the summer. Our currency is one of the most overvalued among its peers,” said Tawifk.
There is no easy way out of this situation, he added, saying that the international economic situation was not in Egypt's favour as slower growth rates in Europe and Asia, together with the decline in oil prices, are affecting both grants from the Gulf countries and foreign direct investment flows worldwide.
Oil is trading at around $50 per barrel, down from around $110 in 2013. Meanwhile, global growth for 2015 is projected at 3.1 per cent, 0.3 percentage points lower than in 2014, according to the International Monetary Fund.
Egyptians were given to believe this week that the dollar shortage is to be blamed on the Muslim Brotherhood. Businessman Hassan Malek and a member of the Brotherhood was arrested earlier this week on initial charges that his foreign currency business was hoarding dollars.
Malek's businesses have been under government sequestration since 2014. The charges were later modified. “This only indicates the failure of the government,” a banker who asked to remain unnamed said.
“The arrest of Malek might imply that the pound was the victim of Malek's financial misdoings or the inefficacy of Ramez,” wrote Ahmed Al-Naggar, chairman of Al-Ahram. “There are more reasonable causes of the problem,” he said, explaining that the determinants of the exchange-rate mechanism for any currency include the country's external balances, as these reflect the availability of foreign currencies, and how real interest rates on the local currency compare to other currencies.
Egypt's balance of trade deficit widened to $38 billion in 2014-2015 compared to $34 billion the previous year. The current account deficit, which reflects the retreat in Egyptian remittances and the decline in grants, stood at $12.2 billion in 2014-2015, compared to only $2.6 billion in 2013-2014. Egypt has received generous Gulf grants that some put as high as $40 billion since the ouster of former president Mohamed Morsi in the summer of 2013.
As for interest rates, these have been negative, which means that the inflation rate has been higher than interest rates since 2007, with the exception of 2012 and 2013. “This encourages consumption versus saving and make the currency weaker vis-à-vis other currencies with positive interest rates,” Al-Naggar said.
While Al-Naggar noted that currency speculation might have a role to play as well on the value of the currency pushing people to keep their holdings of the currency and exacerbating the supply demand gap. But “if the [real] problems are dealt with, any speculative practices will have a limited effect and will not directly affect the exchange market in an emerging economy with regulations protecting the local currencies,” he said.
While the trend of the depreciation in the pound is clear, it is not yet clear what Amer's monetary policy will be. Before the latest drop in hard currency reserves and hike in inflation to 9.2 per cent in September, from 7.9 per cent in August, observers had been expecting a cut in interest rates. The overnight deposit rate and overnight lending rate currently stand at 8.75 per cent and 9.75 per cent, respectively. The discount rate is 9.25 per cent.
If he were CBE governor, the anonymous banker said, he would not know what to do. “Raising interest rates by one per cent would mean an LE12 billion increase in domestic debt,” he said, adding that to make a difference interest rates would have to be raised by four or five per cent.
Raising interest rates might encourage savings in Egyptian pounds, which would in turn prop up the value of the currency as dollar hoarders would convert their currency, making more hard currency available.
He did not pin much hope on increased investment, however, saying that investors are still worried about tapping the Egyptian market. As for improved tourism, that would not be enough to save the economy without increased production.

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