While the Egyptian pound adjusts to new realities, experts tell Niveen Wahish the success of the new system depends on effective management Egypt's foreign exchange market has been undergoing one of its most nerve- racking periods ever since Prime Minister Atef Ebeid announced last week that the government was floating the pound. The pound's value will now be determined by market forces and the general expectation, in view of prevailing economic conditions, is that there will be a depreciation. Indeed, the value of the pound on international markets has been the talk of the town over the past 10 days. Latest figures show that the value of the pound against the dollar has ranged between LE5.35 and LE5.45, just LE0.10 above the rate at which it was trading unofficially before its floatation. Against the euro, the pound stands at LE5.90, reflecting the euro's relatively stronger position on international markets. Meanwhile, the Saudi Riyal, much in demand these days because of the Hajj (pilgrimage) season, stood at LE1.45. Under the government's new system, rates are left to individual banks to determine according to supply and demand for the currency. The banks are required to report their rates regularly throughout the day (as well as at the end of each day), to the Central Bank of Egypt (CBE). The CBE then issues a daily average of the rates. That average is used as an advisory rate for the following day. The difference between one bank and another does not usually exceed a couple of piastres, sometimes just a fraction of a piastre. "The variation between the rates of different banks must not be too drastic otherwise there is a risk that individuals will buy from one bank and sell at another, taking advantage of price differentials," said Pacinthe Fahmy, general manager at Misr International Bank (MIB). She said that the Egyptian pound's tendency for depreciation is due to increased demand for hard currencies, particularly the dollar. People are reluctant to let go of their hard currency because of the probability of a war in the region. "The demand for the Riyal, on the other hand, will ease in a matter of days as the Hajj season comes to an end," she added. However, another banker, who preferred to remain anonymous, does not believe that the value of the pound reflects market forces. "We are still suppressing the value of the dollar," she said. Rather than making dollars available at a high price, some banks are simply saying that they are not available. "There has to be availability irrespective of price. Rumours that the value of the dollar will rise [beyond the reach of most] is a fallacy," she added. "If we keep suppressing it, it will [continue to] rise. On the other hand if we let it go, the market will rectify itself." Indeed, market logic dictates that if banks were to stop suppressing the value of the dollar by making it freely available, they would be able to convince those with hard currency to sell it. This would discourage those who are buying dollars to hoard. As more people sell their dollars, the rate will drop. Sherif Delawar, member of the Higher Policies Council of the National Democratic Party also believes that availability is crucial for the success of the new foreign exchange regime. "If demands go unmet anywhere, even in small branches or banks in the governorates, it will create an imbalance in the market," he said. He also stressed that banks need to closely coordinate to keep an ongoing flow of hard currency. "This is needed to prevent price fluctuations and instill trust in the new regime." Although Delawar advocates making dollars and other hard currencies freely available, he is keen that the short-term dispensation of foreign exchange not go unregulated. With the exception of the need to repatriate the revenues of foreign direct investments or opening letters of credit, there should be limitations on the outflow of hard currency. Fahmy too agrees that things cannot go uncontrolled. She feels that banks need to manage the foreign exchange situation wisely and that they have a responsibility to ask what the money is going to be used for. Regulating the outflow of hard currency is part of a larger package of measures needed to make the system succeed. Delawar points out that our foreign currency resources need to increase and our foreign currency expenditures must be rationalised. However, he warns that foreign currency revenues will not increase overnight, especially in light of tension in the region which will affect sources of hard currency, like tourism and revenues from the Suez Canal. Indeed, he points out that, over the next six months, because an increase in revenues is not expected, the floatation might not be in the Egyptian economy's favour. Thus, hard currency expenditures need to be rationalised. Similarly, Ahmed Noshy, a former World Bank economist, advises that, for the first few weeks of the new system, the government follow a tight monetary and fiscal policy, whereby expenditure and domestic credit are carefully controlled. Once the short-term effects of the new foreign exchange regime have been dealt with, Delawar is hopeful that the market will adjust itself automatically. He expects that in the medium to long-term there will be real restructuring of Egyptian industry, with a greater focus on local inputs. Once consumers decrease their purchases of imported goods, which will increase in price, there will be a shift to local substitutes. Similarly, local industry will begin to look for local components to replace imports, thus encouraging domestic feeder industries. Noshy agrees. "Under the new system, costs will force both producers and consumers to rationalise." However, he points out that some feel the new system may not have the desired effect on imports because they consist mainly of essential commodities. While the positive effects of the new foreign exchange regime will only be apparent in the medium to long-term, the government must first survive its short- term effects. "International financial institutions must support the Egyptian government," said Sherif Delawar. "Liberalising the exchange rate regime has been a long-standing demand of these institutions and they should be ready it to support it... whatever happens, the government must not go back on its decision," Delawar says. Additional reporting by Tamer Sami
