Experts are blaming the government for the continuing devaluation of the Egyptian pound. Sherine Abdel-Razek reports To the dismay of most Egyptians, every aspect of the economy has been affected by the floatation of the pound last January. Since then, the pound has lost almost a quarter of its previous value. The increasing expenses of production as foreign inputs skyrocket in terms of pound costs are eating away at industrial profits, and even pushing up the prices of locally-produced goods, including food, medicine, electrical appliances, and cars to record highs. Everyone is blaming the spiralling dollar, which has become a scarce currency both at local banks and foreign exchange bureaus. The only possible place to buy foreign currency these days, anyone will tell you, is on the black market, where it is now at LE7, well above the official rate of LE6.13. This means that the pound almost lost 25 per cent of its value since its late January floatation, a policy ironically aimed at backing the ailing local currency. The problem is exacerbated by the fact that while the Egyptian pound is losing ground against the dollar, the dollar itself is retreating worldwide in front of most international currencies. Because the pound is pegged to the dollar, the pound's exchange rate to the yen, the euro and even the Saudi riyal is in even more dire straits. Market experts, who are now raising their voices in loud public criticism of the government, argue that this devaluation is going worse than usual for exchange rate liberalisation, because of government management of the situation. Economists and bankers are claiming that while floatation means leaving exchange rates to be determined by the forces of demand and supply, the forex market has not been free from government interference. Last month, Prime Minister Atef Ebeid was quoted as saying that he had asked the banks not to let the pound weaken past LE5.60 to the dollar. According to a report released earlier this month by the British Standard and Chartered Bank, the severe decline in the value of the pound exceeded expectations especially in light of the local economy's success in adapting to the aftermath of the war on Iraq. The report said that the main factor determining the current value of the pound is future risk, which is still very high due to government interference in the market introducing an element of uncertainty. Even economists agree that the government's recent moves to contain the problem tend to backfire. Ahmed Rashad Moussa, head of the Shura Council's Economic and Financial Committee cites the example of Decree 506 -- which obligates exporters and travel companies to relinquish 75 per cent of their foreign currency revenues at the official dollar rate to banks -- as having pushed said companies to keep their earnings outside the country, depriving the economy of a much- needed supply of foreign currency. A move that raised similar reservations was last week's government decision that tourists have to pay the costs of their medication in foreign currency, 75 per cent of which hospitals must then deliver to the banks. It may be true that such measures helped the government to secure the three billion dollars which it said has entered the banking sector since the floatation, said Ahmed Soliman, finance manager at the Suez Canal Bank (SCB), but also threatens to worsen the situation in the long term. "For example, tourists come to Egypt to enjoy its relatively low prices. If we start to ask them to pay for everything they get in dollars, Egypt will lose a main competitive edge," Soliman explained. Economists and bankers argue that an important part of the problem lies on the supply side of the equation. Banks currently deny dollars to anyone except their known clients, and then usually only in limited quantities. One anonymous banker explained that this takes place within the framework of an agreement between the banks and the CBE aimed at reducing pressure on the foreign currency reserves. As for the forex bureaus, they have become the target of continuous inspection campaigns by representatives of the monetary authorities to check their compliance to the rules. This led to the permanent shutdown of 23 companies, while 20 more have temporarily closed their doors. "Few of them are willing to sell at a price calculated by the CBE a day before," observes another government-affiliated economist. So what can be done on the supply level to regain the equilibrium of the market and come out of this dilemma? A government injection of a billion dollars into the banking sector every now and then will fail to put things on the right track, said SCB's Ahmed Soliman. "It is the speculation that pushes the price of the dollar up and this speculation stems from the scarcity of the dollar. If it is available and priced according to supply and demand forces, people will never resort to black market," continued Soliman. Other than trying to coax and wheedle more dollars out of hapless tourists, the government has been brainstorming during the last two weeks for plans to create an equilibrium in the forex market. It is considering setting a new mechanism regulating the interbank dollar transactions between banks, enabling banks with dollar deposits to lend to those with uncovered dollar positions. There are also moves to make Decree 506 more efficient by appointing a government body to supervise its implementation. The General Authority for Import and Export Control is considered to be the leading candidate.
