The pound's floatation continues to be the talk of the town Three weeks into the new foreign exchange system and the market remains jittery. The value of the pound against the dollar has continued to drop, trading at between LE5.45 and LE5.55. Demand for hard currency still exceeds supply. With banks closed Monday through Thursday for the Eid Al-Adha holiday, foreign exchange (forex) companies, are selling and buying according to Sunday's closing price. Hard currency remains scarce. As for the capital market, the upward trend witnessed on the few trading days following the floatation was reversed by the middle of last week, amid a wave of profit-taking. Investors, excited by a sharp surge in share prices soon after the devaluation, rushed to liquidate their positions to realise capital gains. The consequent increase in the supply of shares has led to a general downward trend in the market. However, foreigner interest in the market offset this retreat, with buying activity exceeding sell orders by LE155.6 million, during the week ending 6 February. Equity prices also rose due to a 22 per cent decline in the value of the local currency. As it becomes increasingly clear that the overall effect of the floatation has been a downward trend for the pound, the business community is reacting with mixed feelings. Helal Sheta, deputy chairman of the exporters' division at the Egyptian Federation of Chambers of Commerce said a lower value for the Egyptian pound would make Egyptian exports cheaper and more competitive. Sheta expects the volume of exports in general to increase. "Agricultural exports, in particular, have a better chance since they do not depend on imported inputs," he said. Sherif El-Maghrabi, chairman of El- Maghrabi Agricultural Group, agrees. He believes that the drop in the value of the pound against foreign currencies, particularly the euro, is advantageous for agricultural exporters to the European Union. "Our prices will be more competitive," he said. However, Sheta explains that for exports to increase the benefits of devaluation have to be supported by an improvement in the quality of exportable goods. Sheta predicts that the devaluation of the pound will reduce unnecessary imports, such as toys and clothes. However, he said it will negatively impact industries which depend on imported production inputs. Sheta is pessimistic about what the devaluation of the pound will mean for the local market. He warns that an increase in the foreign exchange rate will trigger a general price hike. "Even some producers who do not use imported goods will use the chance to raise prices," he said. "The devaluation of the Egyptian pound will also lead to a deeper recession." Mustafa Zaki, chairman of the importers' division at the Egyptian Federation of Chambers of Commerce, hopes that the new system will mean that foreign currency will flow into the banking system instead of the black market. This, he said, will make it easier for importers to meet their financial obligations through the official banking system. However, Zaki argues that the devaluation will mean a further drop in the volume of imports. He said that a shortage in foreign currency during the past two years has caused imports to drop from $16.4 billion in fiscal year 2000- 2001, to $14.6 billion in 2001-2002. "This decrease is not necessarily a good sign, since it is mainly in capital goods and materials used for manufacturing, which represent 50 to 60 per cent of the total import value," Zaki said. "This drop reflects deteriorating conditions in the industrial sector. Reducing imports of capital goods means that factories did not import new machines to renew their production lines. It means that local investors did not establish new factories and some workers were fired." Zaki added that a reduction of capital goods and inputs used in manufacturing is an indication that foreign direct investment (FDI) in Egypt is in danger. The flow of new FDI dropped from $1.6 billion in fiscal year 1999/2000 to $428 million in 2001/2002, Zaki said. Importers of consumer goods are already feeling the pinch. Ahmed Abu- Khoff, a car importer, said that the rising foreign exchange rate has made cars more expensive. "Nobody is buying now," he said. "We are in an economic crisis. If this situation continues, the economy will be in a precarious position." But for some economists, the decline in the imports bills is a desirable effect of devaluation. Hussein El-Hamawy, professor of international business at Ain Shams University's Faculty of Commerce, said that the floating of the pound will cause imports to drop. "Imports will become more expensive, which will force us to depend on local products," El-Hamawy said. "This will help adjust consumer behaviour. We import many unnecessary products, such as fruits for example, when Egyptian fruits are readily available." Mahmoud Soliman, chairman of the Tenth of Ramadan Investors Association, says that the floatation was a step in the right direction for Egyptian businesses in general. He argues, however, that certain supportive measures and policies must be adopted by the government in order to make the move effective. "To consolidate the exchange rate of the dollar is to spare businessmen a lot of unnecessary headache," said Soliman. He added that it was difficult for businessmen to operate in a market where there were two exchange rates for the dollar: the official one and the actual market price. "That caused us a lot of trouble, particularly with the customs and tax authorities." However, Soliman expects a slight increase in inflation rates and said that the poor may become more vulnerable due to price increases in vital household goods. "Foreign exchange traders should not take advantage of the current situation and the government has an important role to play in the forthcoming period as a stabiliser of the market," he added. Both industrialists and importers, who have scheduled debts in dollars, will be negatively affected by the decision, Soliman said. "To do these businessmen justice, the banks should reschedule their debts according to the actual exchange rate prior to the decision," he concluded. Reported by staff
