An apparent lack of faith in the local currency continues to undermine the value of the pound, writes Niveen Wahish One month after the pound was floated, its value is still plunging with no prospects for stability in sight. Central Bank of Egypt (CBE) Governor Mahmoud Abul Oyoun said that, in less than a month, the buying rate for the dollar against the pound has increased by 15 per cent compared to its official price prior to the floatation. This week started off with a further drop in the value of the pound, which is being officially traded at between LE5.1 and LE5.6 against the dollar. On the black market, the pound was trading at over LE6.6. The pound's floatation, which was expected to render the black market obsolete, did nothing of the sort. The black market is, in fact, flourishing because banks have been unable to meet the demand for dollars. "If inflows [of hard currency] were higher, all demand would be met," Abul-Oyoun said at a meeting organised by the American Chamber of Commerce in Cairo (AmCham) last week. The lack of foreign currency resources has been exacerbated by increased demand. Abul- Oyoun said that CBE data shows an increase in demand for imports. "We cannot blame people who are expecting a further depreciation of the currency," he said. To abolish the black market, Abul-Oyoun suggested that businessmen and individuals change their foreign currency to pounds in order to increase the inflow of dollars into the banking system. In the meantime, he said the CBE will not allow any illegal transactions that might jeopardise the system. In fact, eight forex bureaus have already been permanently shut down and the CBE governor said banks found in violation of the system would be penalised. But Abul Oyoun was not all threats. On a different tone, he urged the close to 1,000 people attending the AmCham event to help make the new system sustainable and successful. "There is no other way out," he said. "A system without commitment from all of us will not work. Confidence is required by all participants to turn this system into a success." Abul Oyoun's words come as part of government announcements last week urging businessmen, exporters and travel agents to exchange their hard currency through the official channels, such as banks and forex bureaus, hoping it would pump more resources into the system. These announcements had provoked strong reactions from the business community, until they were assured by the government that their compliance would be "voluntary." However, last week, Minister of Tourism Mamdouh El-Beltagui issued a decree stipulating that hotels must exchange 75 per cent of their hard currency earnings at an accredited bank at the official exchange rate, in order to pump much-needed foreign currency resources into the system. The decree also obliges tourist companies to pay hotels in foreign currency. Abul-Oyoun reassured his audience that the CBE has not relinquished its support of the market and that it has an "unannounced policy" of continuing to intervene when necessary. However, he made it clear that, while supporting the market, "the CBE is not there to defend any rate. Decisions regarding the rate are taken by banks." Meanwhile, Egypt's foreign reserves are used to support the CBE's measures of intervention. "The size of those reserves should not bother us," he said, adding that they are being replenished every day. Abul-Oyoun stressed that the CBE will never withdraw its guarantee to foreign investors to repatriate their revenues or exit the market. A recent CBE press release said there are no restrictions on the right of depositors to withdraw any part of their deposits in any currency. The statement came out following widespread rumours that banks were going to sequestrate all hard currency deposits and replace them with Egyptian pounds. Some people acted on those rumours by withdrawing their dollar savings, causing a worse dollar crunch. However, the CBE did place a number of credit guidelines instructing banks not to give credit in local currency in exchange for hard currency guarantees. The only exception was to be made for companies working in Egypt that are being guaranteed by banks abroad. Also, the guidelines stipulate that hard currency credit should only be extended if the client can pay back in hard currency. And while the government attempts to curb demand for hard currency on the one hand and encourage individuals to exchange it through the legal channels on the other, it has another serious problem to deal with: soaring prices. Prime Minister Atef Ebeid has been quoted as saying that prices of basic goods have increased by between 10 and 40 per cent. The outcome of a number of recent cabinet meetings to deal with the problem was a decision to have all retail prices unjustifiably raised during February brought down to the original price. The cabinet also decided that those who need to increase the price of a certain product must first refer to their concerned chamber of commerce. Also, only products whose letter of credit was paid for in hard currency are eligible for price increases. The Ministry of Supply and the Tax Authority will jointly be monitoring the market and ensuring that traders are abiding by the new regulations. In the meantime, the government said it will import any product whose prices are raised unjustifiably. Violators have been threatened to be placed on a "black list" and their commercial registers annulled, in addition to being kept under tight scrutiny by the Tax Authority.
