The Egyptian pound rose on the black market for the first time in eight months. Sherine Abdel-Razek investigates the reasons Black market rates for the dollar reversed their dizzying rise and headed south earlier this week to hover around LE6.8-6.9, compared to its highest level ever of LE7.30 last week. The official rate, in banks and exchange bureaus, maintained its value of LE6.13. While some media reports said that the change was due to Central Bank of Egypt (CBE) intervention by selling dollars to support the local currency, bankers, economists and money dealers interviewed by Al-Ahram Weekly were divided among themselves as to the reports' validity. CBE sources declined to comment. "I believe that the CBE sold dollars to certain banks with uncovered dollar positions to ease the shortage. I am not sure of the value of the dollars sold, but it would not have exceeded $55 million," said Kamal Muawwad, head of the Pharos exchange bureau. However, there is another side to the story. "The change stemmed from the CBE's interference by covering the letter of credit submitted by the General Authority for Commodities Supply to import subsidised food necessities. By doing this, the CBE provided banks with the needed funds to cover the demands of other importers and the supply side of the market was strengthened," said Yasser Hassan, general manager of the Watany Bank of Egypt. Other bankers and money dealers believe the rate change was triggered by the government's statement at the National Democratic Party conference last week that it will support the forex market by channeling $400 million of its foreign reserves to the banking sector. In other words, it was a psychologically driven revival for the pound. "When people hoarding the dollar felt that the government might fill the supply- demand gap, they started selling, pushing the price down," explained Amr Bahaa, head of treasury at the Egyptian Commercial Bank. Whatever the reason, market observers let out a sigh of relief for the first time in months. Reaching 7.30 meant the pound lost more than 30 per cent of its value since the flotation, which put a burden on exporters, producers, importers and, most importantly, the man on the street who has to shoulder unprecedented increases in prices. What makes the recent revival significant is that it is not only in the parallel, or non- official market, that the market forces are moving in favour of the supply side. The licensed money bureaus saw a selling spree even at their low prices compared to the black market's. Supply of dollars in the bureaus increased by an estimated 20 per cent. But is it a short-lived recovery or will the market be able to maintain this new direction? Experts are unanimous that if the government fulfills its promise and injects funds into the dollar starved money market the parallel market rate will further decline and stabilise around 6.15-6.20. Amr El-Alfy, assistant researcher at the Commercial International Brokerage Company, said that if the government is planning to inject, or has already started injecting, the promised $400 million, it must not stop there as the market is starving for foreign currency, and will absorb such a small sum quickly and the problem will reemerge. "This has to continue until the dollar reaches the value which the government feels is suitable to support exports and give it a competitive edge, and thus secure a sustainable source of foreign currency," he said. Economists also believe that a decline is inevitable as the dollar is overvalued in light of the currently improving economic indicators. A report issued by British Business Monitor International ranked Egypt 55th among 94 developing countries in regards to the efficiency of economic indicators, and expected the exchange rate to stabilise at LE5.30 by the end of this year. On another positive note, a CBE report on the Egyptian economy, released last week, showed that the foreign reserves reached $14.8 billion in June, a $700 million increase from its level the same time last year. It also noted that the balance of payments recorded a $546 million surplus during the fiscal year 2002-2003, compared to a deficit of $456 million the previous year. This is the balance of payment's first surplus since 1997. "It is not only indicators, it is a matter of confidence in the market," El-Alfy said. He explained that the existence of the parallel market means that there is a lack of confidence in the government's ability to cover demand. He illustrated this by pointing out that foreign investors struggled two months ago to repatriate $60-70 million worth of profits from local banks back to their home countries. Moreover, "the government has to stick to its full liberalisation policy as the exchange rate regime has not yet been fully liberalised. The official rate is indirectly managed by the government," El-Alfy said. The float is believed to be dead by some analysts, as the CBE still controls official bank rates and is still fixing import prices for key food items. "Confidence is the main problem here, it's easily lost and very hard to get back," El-Alfy said.
