The fluctuation of the exchange rate between the Egyptian pound and the US dollar has created much debate in Egypt. This wave of fluctuation is not new, though it has been sharper than previous ones. Great hopes have been pinned on the governor of the Central Bank of Egypt (CBE), as if he had a magic wand and could solve the dollar shortage by the stroke of a pen. However, this article proposes that there is no right or permanent solution to the dollar shortage other than a properly managed investment climate supported by sound industrial policy. First of all, it is necessary to appreciate the role of the CBE. This is an independent regulatory institution that performs many key functions, including ensuring the soundness of the banking system and securing price stability, formulating and implementing monetary policy, managing foreign currency reserves, regulating the functioning of the foreign exchange market, supervising the national payments system, and recording and following up Egypt's foreign debt, whether public or private. The CBE is not a source of generating US dollars but is merely a reservoir of dollars coming from outside sources. It works as the organiser of the country's foreign reserves. Under certain conditions the CBE has no option but to strongly intervene in the economy to put things in due order, and this is exactly what it is doing today. It deems this necessary for the same reasons that invite any central bank to intervene, among them fluctuations of capital flows that reflect unstable expectations and induced movements in exchange rates causing unnecessary changes in domestic output. The central bank may also move the exchange rate to affect trade flows, and it may prevent the exchange rate from depreciating with the aim of preventing import prices from rising and, accordingly, helping to slow inflation. The exchange rate plays a crucial role in any economy and can affect the import and export capacity of the country. It can therefore have a tangible impact on national output. Furthermore, the exchange rate can play a paramount role in correcting imbalances in the current account. Most importantly, it plays a decisive role in determining the burden of foreign debts. From a traditional point of view, while the control and management of foreign exchange reserves have been the preserve of central banks, the accumulation of foreign exchange reserves is not the main task of any central bank anywhere in the world. These can only be built from a strong economic performance and surpluses in the current account: in other words, the level and rate of capital inflows and outflows. According to the literature, central bank intervention in the exchange rate seeks to prevent local currency depreciation and requires a high level of reserves. A steep depreciation in the local currency will have political, social, economic and credit risks. Because of this, central banks sometimes intervene to support the exchange rate or to slow the pace of depreciation. However, interventions by central banks have been shown to have little lasting power to influence the real exchange rate. In cases where domestic currency depreciation results from weak economic performance, the intervention of the central bank, even if it raises interest rates, may not help stabilise the exchange rate. The International Monetary Fund (IMF) has set out guidelines for foreign exchange reserve management and defined a range of objectives that can by supported by holding adequate foreign reserves. The foreign reserves held at central banks support the following objectives: to support and maintain confidence in policies for monetary and exchange rate management, including the capacity of any intervention to support the national currency; to limit external vulnerability by maintaining foreign currency liquidity in order to absorb shocks during times of crisis or when access to borrowing is curtailed; to provide a level of confidence to the markets that a country can meet its external obligations; to demonstrate the backing of the domestic currency by external assets; to assist the government in meeting its foreign exchange needs and external debt obligations; and to maintain a reserve for national disasters or emergencies. The US dollar is like any other commodity that is subject to the laws of demand and supply. If there is any disturbance between the supplied and demanded quantity, disequilibrium emerges. In some cases, market forces can bring equilibrium back. If not, the intervention of the government becomes an urgent option. DECLINING RESERVES: Egypt's foreign reserves declined from $36 billion before the 25 January Revolution to nearly $16.8 billion today. The causes of the dollar shortage can be explained by a decline in exports due to the political instability in some Arab countries, in addition to declines in the number of tourists visiting the country that were aggravated after the Russian plane crash in October 2015. The lack of US dollars is a temporary phenomenon, provided that the right policies are followed. Personally, I see the current problem of the lack of dollars as not being without advantages. The key advantage is to reconsider the entire position of the Egyptian economy and to transform it from being a rent economy to being an industrialised economy. The CBE has a Coordinating Council to manage fiscal and monetary policies. This is headed by the prime minister, and its members include the CBE governor, the minister of trade and industry, the minister of investment, and the minister of finance, in addition to the former governor of the CBE, Farouk Al-Okdah, economist Mohamed Al-Erian, and the chair of the Economic Council, which is affiliated to presidency. The advantage of this composition is that it includes diverse economic expertise and officials who are at the centre of decision-making. What kind of advice can be provided to the Coordinating Council? There is no better advice than a proper investment climate complemented by sound industrial policy. Concerning the investment climate, more efforts are needed to secure a reliable legal framework that provides the strict and fast enforcement of contracts, the elimination of burdensome bureaucratic regulations, an efficient financial system that provides cheap and easy access to capital, transparency in administrative decisions, and a transparent tax system. The government is fully aware of these things and is serious in tackling them as fast as possible. Efforts are also being made to expand the country's productive base by giving due attention to small- and medium-sized enterprises and attempts to operationalise idle industrial capacity. The Ministry of Public Enterprises has been set up to inject life into public-sector companies. The cure for the dollar shortage can be brought about once and for all by formulating an industrial approach that applies two policies at the same time. The first policy is an import-substitution policy and the second is an export-oriented policy. The import- substitution policy is the key to development in light of the prevailing international economic circumstances. This policy has dominated since the 1950s, and it is still valid in overcoming shortcomings reflected in a high rate of protection and a decline in the level of competitiveness of exportable goods, particularly in the context of a fluctuating local exchange rate. Policy-makers should bear in mind that industrialisation is the cornerstone of Egypt's economic future. We have to re-assess our past industrial policy and find answers to the question of why Egyptian industry has not succeeded in meeting either domestic needs or gaining a greater share of the international market. The well-known economist Said Al-Naggar has specified four factors behind Egypt's failure in shifting from import-substitution to export-orientation, including, first, the fact that since the end of the 1950s Egyptian industry has been under the umbrella of a public sector that is not able to compete in international markets in respect of types of goods, specifications of goods, and punctuality in delivering goods, all of which negatively affected the confidence of consumers in high-income countries. Second, the country's industrial policy, since its inception, did not correctly distinguish between industries in which Egypt had a comparative advantage and those in which it had no comparative advantage. The slogan “from the needle to the rocket” was not a proper approach. Third, the application of a strict protectionist policy led to separating the domestic market from the global market regarding production efficiency and cost and price levels. Fourth, macro-economic disturbances made the domestic market more profitable and did not permit the growth of export industries. The Egyptian economy is an emerging economy, and it will expand in future, meaning that the demand for dollars will also increase due to increasing imports of the equipment needed for potential investment. The problem will be sharper if the supply of dollars continues to be insufficient. Closing down exchange bureaus will produce fruit only in the short run. While the current external imbalances can be financed in the short run, in the long run an adjustment process should be implemented, either by reducing the level of spending or switching the spending composition between domestic products, imported products and exports. REAL SOLUTIONS: The problem of the dollar shortage should not be dealt with in the context of bringing the exchange rate down to its previous level. We have to deal with the matter in a more sustainable way, taking into account the fact that the Egyptian economy must grow in the coming period in order to absorb challenges such as unemployment, inflation, weak export performance and slow tourism and foreign direct investment. Most importantly, we have to realise that politics follows economics. In this respect, the restoration of Egypt's leading political role will depend on its economic strength. The political role should be invested in overcoming the weakness of the country's economic resources. As stated, the dollar is a commodity that is subject to supply and demand. Adjusting the supply side is the right approach simply because the demand side cannot be fully controlled due to its having to meet the needs either of imports of food and other goods to meet the needs of a continuously increasing population, on the one hand, or of increasing the imports of the intermediary inputs and equipment required for the investments that we aspire to increase by a factor of ten. In spite of the fact that there is a shortage of dollars, there are causes for optimism. The government has invested in manufacturing, and this will reduce imports and may lead to increases in exports. Egypt is serious about creating a conducive investment environment, and it has adopted an economic reform package in the form of amending some legislation and introducing new laws to reduce the bureaucracy that stands as a hindrance to investments whether local or foreign. Recently, the government introduced legislation on industrial licences and import records. Some people are groundlessly pessimistic about the shortage of dollars. Personally, I think that the dollar is like any other commodity. When demand exceeds supply, a problem emerges, but when supply exceeds demand there is a problem as well. To overcome the shortage of dollars once and for all there is no option but production. Through production Egypt will be able to meet domestic demand and accordingly reduce the pressure on the pound, on the one hand, and increase exports and accordingly increase its earnings of foreign currency, on the other. We have to bear in mind that the shortage of dollars is a temporary phenomenon and that the reserves will increase provided that the right policies are implemented. Furthermore, at a time when we plan to expand the economy in terms of exports and the volume of the public budget, we have to increase the reserves to meet the needs of investments. The proper measures should be on parallel lines: first, maximising dollar revenues, accompanied by rationalising their use; and second, managing the reserves in a manner that curbs inflation but not at the expense of discouraging investment, creating new jobs or achieving growth. I invite policy-makers in Egypt to extend their thinking away from the short term in which the Egyptian pound is depreciating against the dollar, although this is very important. We have to build on the restoration of political stability and improved confidence in the Egyptian economy. Clear examples of the latter have been seen in the visits by top officials from Saudi Arabia, France and the UAE in recent months, together with missions by many businessmen from other countries. Because of the current shortage of dollars, the CBE is injecting foreign exchange into the economy to meet import needs and clear backlogs. We should do all that is necessary to expand the volume of the Egyptian economy, and this will not happen unless we operationalise every production unit, regardless of whether it is public, private, micro, medium or small. Only in this way can we truly eradicate the causes of the dollar shortage. The writer is in charge of anti-dumping policy at the Ministry of Trade and Industry and is writing in a personal capacity.
