Wael Gamal investigates the effects of the US dollar's slump on the local economy The dollar is tumbling again. Last week, it sank 1.2 per cent to $1.28 against the euro, a rate even weaker than its all-time low of $1.29. The dollar has fallen by over 30 per cent against the euro since 2001. This latest slide catalysed speculation that the greenback is -- as described by The Financial Times -- on the edge of a cliff. If true, it would also be bad news for the Egyptian pound, which will be paying a heavy price just as its rate against the dollar has finally stabilised. The fact that the pound's exchange rate is linked to the US dollar means that when the dollar plunges against a certain currency, the pound goes in the same direction. "Our exchange rate system's free market approach works for the pound and the dollar, and then translates itself concerning other currencies," said Ismail Hassan, the former Egyptian Central Bank governor and current president of Misr Iran bank. "Everything that happens to the dollar's rate certainly affects the Egyptian pound. This is the natural price of the absence of a system based on attaching the pound to a basket of currencies." The euro, meanwhile, recorded its highest levels ever last week against the pound on the local exchange market, climbing to LE8.06 before sliding back to LE7.96 by the end of the week. "All other international currencies followed, including the yen and the sterling. But the euro seized about 40 per cent of the dealings," said Ali El-Hariri, general secretary of the foreign exchange bureaus' division at the Federation of Chambers of Commerce. The dollar's two-year retreat had been masked by the sharp depreciation of the Egyptian pound after its devaluation in January 2003. This time, with a stable pound to dollar rate, the effects will be clearer. The most important will be a deepening of the trade deficit with the European Union, Egypt's major trade partner. "Theoretically, imports from the EU will be more expensive, and our exports will be cheaper, which means a better chance for growth," said former Economy Minister Sultan Abu Ali. "The net outcome depends on what happens on both sides." The EU share of Egypt's international trade was about 30 per cent in 2003, according to official Egyptian data. European figures place the value of Egyptian exports to the EU in 2003 at $3.832 billion (up from $2.026 billion) and imports from the EU at $6.769 billion (up from $2.801 billion). While the Egyptian estimate of the trade deficit was just about $775 million, the European estimate amounted to $2.937 billion. Either way, the impact will be significant. Is there a way out? Hassan postulated a possible positive side based on a decisive factor. "The elasticity of Egyptian trade trends will determine to what extent the effect of a stronger euro can harm our trade deficit, or even benefit it. If the Egyptians could divert their exports to the EU, while depending on cheaper markets for imports, the new development can be positive." Both Abu Ali and Hassan agreed that the most immediate effect would be higher prices for consumers, as a result of imported commodities from the EU being more expensive, and production costs rising in many local industries due to the fact that a significant amount of capital and intermediary goods are imported from the EU. The value of Egyptian international reserves, mainly in dollars, may also feel the effect. "The structure of our international reserves should match our foreign debt structure," Abu Ali said. In the end, it will all depend on how low the dollar will go. Khaled Abu Heif, the general manager of CIBC brokerage, said the trend would be short-lived. "It doesn't reflect an American economic weakness compared to the EU. European economic growth is very slow, and the Americans won't let their currency crash. It is part of their national image." Short-term factors, said Abu Heif, "are the ones in action here. The uncertainty generated by the American elections, and skyrocketing oil prices, pressured the dollar down temporarily." International business circles aren't quite as confident. The Economist, for example, has concluded that the wolf is at the door this time around, since the growing American budget deficit has reached 5.7 per cent of gross domestic product. Economic analysts estimate that the dollar's trade- weighted value might need to fall by another 20-30 per cent to trim the deficit enough to stabilise the ratio of America's external liabilities to GDP. Though it might seem unthinkable, that could imply a rate of around $1.70 against the euro.
