The current exchange rate policy has not helped the trade balance, the flagging economy, or budgetary woes. Ahmed El-Naggar argues it could not possibly have succeeded Since the Egyptian government allegedly freed the exchange rate, the Egyptian pound has been in a free fall against the US dollar. Meanwhile, a flourishing black market indicates that even now the Egyptian pound has not been wholly floated, since the idea of a free pound is for the "official rate" to equal the market rate at any given time. People can now sell foreign currencies at the official rate, but they will have trouble buying them back at the same rate. As a result, much foreign exchange activity has remained in the black market. Two months ago, the government tried to undermine the black market by pumping $400 million into the market, while stiffening measures against black market dealers. This move not only failed to end the black market, but it triggered complaints by those who could not buy foreign currencies at the official rates, and who claimed that the injection of dollars mostly benefited big businesses. These are all signs that the Egyptian pound is still not fully convertible, and that substantial problems are likely to remain. The next few weeks may see further instability in the exchange market as foreign companies and employees begin repatriating their earnings. And the pilgrimage season, about 10 weeks away, will only complicate the situation. One must remember that a liberalised exchange rate should not itself be an end but a means to a basket of economic goals: reviving the economy, attracting foreign capital and tourists, boosting the competitiveness of exports, and balancing external payments, for example. Thus, the exchange rate policy should be judged by its success in achieving those goals. The so-called freeing of the Egyptian pound was implemented just when Egypt had run up a massive trade deficit of over eight billion dollars in 2001/02. The real figure is perhaps higher, considering that Egyptian exports to the United States are three times higher in the published statistics of the Central Bank of Egypt ($2.6 billion for 2001/02) than in the more reliable US official records and International Monetary Fund data. Compounding the issue, the official trade deficit rate overlooks the fact that around four billion dollars' worth of goods is smuggled into Egypt every year. The freeing of the pound took place as the country suffered a foreign currency crisis associated with the aftershocks of the 11 September attacks and the impending US war on Iraq. The number of tourists visiting Egypt dropped from 5.51 millions in 2000 to 4.65 million in 2001, and tourism revenues fell from $4.3 billion in 2000 to $3.8 billion in 2001. The number of tourists recovered in 2002 to reach 5.2 million, but tourism revenues stayed relatively low, because of price cuts the industry introduced to entice visitors. The exchange rate of the Egyptian pound has another long-standing problem -- it is basically pegged to the dollar. This makes it fluctuate against other major currencies whenever the dollar does, instead of for its own reasons. This is one problem to which officials should have attended to before the so-called freeing of the pound. Possible solutions include linking the pound to a basket of major currencies, such as the dollar, the euro, the yen and the British pound. The rapid decline of the Egyptian pound in 2003 should have had a powerful impact on reducing imports, as they become more expensive on the local market. But a decline in imports depends on Egypt's ability to dispense with them or to produce effective substitutes, as well as to the stability of the prices of local substitutes. What happened, after the pound fell, was that most local producers, including agricultural ones, increased the prices of their products, regardless of whether the production of these goods used imported components or not. This blunted the edge local goods were supposed to gain over imports in the Egyptian market. A liberalised pound was touted as a means of boosting exports. However, in order for this to happen, Egypt must have exportable products, ie products that meet international standards and specifications. These products should also roughly retain their predevaluation prices, so as to become more attractive to foreign buyers. Neither of these requirements was met. The fall of the pound over the past few years, particularly in 2003, should make Egypt more attractive to tourists as well as investors, as local goods and assets become cheaper. But investors want more than a cheap exchange to send their money into a country. For example, they need credible transparency, the elimination of corruption and the reduction of red tape, minimised smuggling, and the effective protection of intellectual property rights. None of these has yet happened. Therefore the fall in the pound coincided with a drop in foreign investment, from $1.7 billion in 1999/2000 to $509 million in 2002, then $428 million in 2001/ 2002. Furthermore, most of the foreign direct investment that entered Egypt during that period was not new investment but purchases of privatised companies, and therefore involved no addition to the country's productive assets. There was one outcome clearly caused by the devalued pound: inflation. As imports became more expensive, the prices of such basic commodities as wheat, sugar and oil went up, bringing the inflation rate to 4.5 per cent in August, according to official data. Independent researchers put inflation at a much higher rate. In order to stabilise the price of basic commodities, the government will have to increase subsidies, risking a higher budget deficit. Evidence that this is already happening is unmistakable. The budget deficit has climbed from one per cent of GDP in 1997/8 to 2.9 per cent in 1998/9, 3.9 per cent in 1999/2000, 5.6 per cent in 2000/2001, and 5.8 per cent in 2001/ 2002, according to optimistic official figures. The Central Statistics Agency, meanwhile, estimated the deficit to be 9.5 per cent of GDP in 2001/02. The government may decide not to raise the level of subsidies, but this would involve certain risks, social as well as political. The fall of the pound was a terrible blow for those who kept their savings in local currency. The significance of the devalued pound for the purchasing power of the Egyptian middle class and the future of savings in the local currency is all too clear. In brief, the money market crisis mirrors the state of our flagging economy. In particular, it reflects the pathetic lack of competitiveness of our economy, the huge trade deficit, and our insatiable appetite for foreign cash -- mostly a result of corruption and various black market activities. The only way out of this crisis is to put together a purposeful economic policy and, if necessary, a new economic regime; one that can ask the right questions.
