Although not yet fully recovered, the foreign currency market is significantly more stable at present. Yasser Sobhi reports Exchange offices around the country are not doing much business these days. New Central Bank of Egypt regulations have helped the market mature, bringing about a more stable dollar price and a decline in black market activity. Even the speculation-fed euro fever has dissipated. The government has taken strict disciplinary measures to bring what was a chaotic exchange market back under control. "Exchange offices are working with only 10 per cent of their capital and the rest is deposited in banks. During the last few months, several companies have closed down due to these severe decisions," Sami Abdel-Hamid, president of Al-Safa Company for Exchange, said. "Now companies are beginning to gradually withdraw their capital from banks and work with it. The regulations have helped the market regain order and stability. The more stability we have, the more companies will increase their activities." In the past few months, Egyptian authorities have arrested traders and mediators who manipulated the market situation to their benefit. The CBE has suspended the activities of several exchange offices and ended the licenses of others for illegally attempting to steer the exchange rate by refusing the sale of foreign currency or selling at rates that differ from the ones announced by the company. By selling at higher prices, they hoped to raise the dollar rate in the market and thus provoke speculation. The CBE's daily announced price indicator, standing at between LE4.63 and LE4.64, depends on the general average of transactions in banks and exchange offices. Operators are allowed to trade the dollar within a two per cent upwards and downwards band. The CBE can change the announced price if significant movement occurred in the market. Meanwhile, the black market dollar price fell from over LE5 to LE4.96 and operators say they expect more of a decline. "The sellers of dollars are part of the problem. They ask for higher prices beyond the band limit, but no trader is willing to do that anymore. It is not worth the risk. So, the sellers seek buyers outside the financial institutions. But when they find this route is no longer open, they will come back to the exchange offices. We don't think it will take a long time to return to normal activity," Abdel-Hamid said. This scenario would be feasible provided there is an availability of foreign currency. The International Monetary Fund's report on the Egyptian economy issued at the end of July says the current account showed a "small deficit of some $200 million in 2001/02, compared to estimates [prepared by the IMF] in January for a deficit of between $1.5 to $2 billion". So, despite a decline in foreign exchange receipts post-11 September, the flow of foreign currency to Egypt was better than expected. A drop in imports, an increase in non-oil exports and a surge of tourism receipts, among other foreign currency inflows, have helped reduce the deficit. Since mid-2000, the CBE has adopted a more flexible exchange regime -- still pegged to the dollar -- which led to a 35 per cent depreciation of the pound. Nevertheless, a dual exchange rate system still exists. Banks have instructions to give priority to producers and provide them with all their hard currency needs in order to help them import the necessary material. Other importers who are not accorded such an advantage have to secure their foreign currency needs through unofficial channels sometimes. "The banks don't say no. But they keep you waiting for months on end at times, forcing you to search for other alternatives," an importer of tourist products said. "After the disappearance of illegal traders and the closure of many exchange offices, a new class of currency traders has surged. They are businessmen working in exports or tourism who lend to their counterparts in other sectors. Friends lend to friends and those sell to others. The good news is that the dollar is available in this new market and that prices are declining." At a recent meeting with banks, Ibrahim Aboul Eyoun, governor of the CBE, said that 90 per cent of dollar transactions are made through the bank rates. "But there are still two prices for the dollar. The unification of the exchange rate and the elimination of the parallel market are crucial to regain investor's confidence in the economy," said Hussein Choucri, president of H C Securities and representative of Morgan Stanley Dean Witter & Co in Egypt. "It's all about confidence. With the same economic conditions, the economy was doing well when the pound rate was 3.4 to the dollar. It was when people had a good perspective on the economy." In the last three years, doubts regarding the future of the economy led investors to predict a depreciation of the pound, provoking a return to dollarisation. Still, the wide gap between interest rates in Egypt, which stand at 11.5 per cent, and those in the United States, which are about 1.5 per cent, and no significant difference in the inflation rates between the two countries, has lured Egyptians back to depositing their money in pounds. The past two months' euro fever has also died down. Heavy speculation, due to expectations in the international markets, increased demand on the currency in the Egyptian market. According to Abdel-Hamid, speculation has now almost disappeared and only operators who need the euro are seeking it. Meanwhile, the high demand for the euro in Egypt could be considered as a market signal. It could indicate a readiness to implement a basket of currencies system rather than the present one that relies on the dollar solely. The suggestion, which appears logical given that the European Union is Egypt's leading partner in trade and tourism, has been postponed by the authorities due to uncertainty about the euro's performance in its early stages. "We have to wait for better timing," Choucri said. Investors, operators and policy makers seem more prepared for a liberal exchange market, which would enhance stability and reduce fluctuations and hard shocks. But, since the exchange market is immediately impacted when the economy falters, it needs to be backed by sound and credible economic policies and reforms.
