Unfettering the currency

The government's experimental management of the exchange rate regime has left experts disappointed. Niveen Wahish delves into the forex quandary
"The loaf of bread has shrunk," Maha Abdel-Latif, a housewife and mother of two, complains. A month ago, one 15-piastre loaf was enough to make two sandwiches for her children. "Today," she stresses, "It's three-quarters of its original size!"
Like many others, Abdel-Latif's local baker has had to make a compromise: reduce the size of bread rather than increase the price -- a ploy in direct reaction to the pound's devaluation. It is nothing new, however, with the government's forex grappling now reaching its two-year mark. The fluctuations started to rumble in 2000, when the once-norm LE3.3 dollar rate began to twitch. In response, the government has made numerous attempts to stabilise the pound -- none quite hitting the mark. Hence, the rate of scrutiny has been great.
Last week, at a meeting organised by the Alexandria Businessmen's Association (ABA), former ministers of economy, economic experts and businessmen spoke without reserve in their critique of the government's failed exchange-rate endeavour, stressing that an immediate solution is critical to curb prices of basic commodities from sky- rocketing.
"The forex regime remains unclear," Faika El- Rifai, former deputy Central Bank of Egypt (CBE) governor, said during the meeting. El-Rifai explained that the CBE has combined the adjustment of the central rate with an adjustment of the band within which the pound is allowed to move. In January 2001, the band was one per cent up or down. In August of the same year, it was increased to three per cent. Since January 2001, however, the CBE has modified the central rate six times, sometimes by only a few piastres and sometimes by LE0.50; an erroneous move in any attempt to stabilise a currency, El-Rifai believes.
"If the margin is widened and the market is run efficiently, the parallel (black) market may be brought under control," El-Rifai said.
She urged that the margin within which the pound is allowed to move up or down be widened by up to seven per cent. Such a move, El-Rifai empahsised, must be accompanied by a constant injection of hard currency into the market as per demand -- including, too, the pipeline demand for credit.
The situation today, El-Rifai recalls, reminds her of the pre-1990 reform days when dollars were in short supply and hard to find. "Measures must be taken to regain the trust of the people," she said.
"Trust" was certainly an issue at the gathering. Trust in the system was deemed by all to be essential for the nation's monetary cycle to flow. Explaining the buoyant effect trust can have, Ali Negm, former CBE governor, recalled the $70 billion converted into Egyptian pounds during the first two years of the reform programme when trust was high.
The action, however, needs to come fast. Six months after an economic catastrophe, El-Rifai says, is slightly too late. Until the government and CBE have a clear plan, an immediate, short-term measure must be taken to save a stumbling situation.
Former Minister of Economy Mustafa El-Said pointed out that the government has, regrettably, played most of its cards in the struggle to stabilise the pound, with CBE having used its foreign reserves to alarming excess -- leading President Hosni Mubarak to halt the measure.
"It has also lowered the value of the pound considerably and should it go any lower it will lead to some serious repercussions," El-Said said. He added that the assistance the government has requested from international donors is hoped to be in the pipeline. "Unless the deficit in the balance of payments is dealt with, however, the government will have difficulty repaying its loans."
The immediate band-aid? The rationing of imports, he emphasised. "This will ease demand for the hard currency, but the problem is how that will be done."
El-Said praised CBE's decisions of last November intended to regulate, and ultimately, decrease imports by cancelling documentary collections.
Unlike letters of credit -- opened by banks on behalf of clients -- documentary collections are agreed upon directly between trading parties, hence allowing importers to pay for goods with ease, and without the headache of also paying a high commission to banks.
The reversal of the cancellation decision later was received with much praise, but it has left the situation once again unresolved, El-Said said.
"The November decisions were good," said Mohamed El-Hennawi, board member of the Capital Market Authority (CMA), "But they were issued at bad timing and public opinion was not prepared for them."
Ali Negm, one of the architects of the CBE November decision, also lamented the withdrawal of those decisions. He said that the import system is dysfunctional. Currently only 42 per cent of import transactions takes place through letters of credit while 58 per cent are completed through documentary collections. "The size and type of products being imported is not known as a result of this," he pointed out.
Solely regulating imports through banks is not enough, however, says Sultan Abu Ali, a former minister of economy. A stronger, more direct intervention is needed from the government, he stressed, in the form of decrees banning certain imports as per need. Other participants supported the suggestion, stressing that "international agreements allow this," and that such stringent measures are the government's right at a time of economic turbulence.
El-Rifai said there are other things that need to be done in tandem.
"Smuggling is draining our foreign reserves beyond our expectations," she said emphasising that any ban on imports will prove ineffective unless smuggling is clamped down on.
Imports are not the only issue of top-notch importance. Bulk-sum cash disposal by banks to customers is also of key concern and already on bankers' list of immediate obstacles to tackle.
In an effort to control the flow, no hard currency cash is handed over-the-counter, except on presentation of a Visa and plane ticket. In addition, a $1,000 limit per day has been placed on cash withdrawal through credit cards for accounts with no foreign currency backing -- a measure taken against those who use their credit cards to cash in on dollars abroad and sell them at a higher rate in Egypt. These alleged transactions are thought to be a big part of the currency problem. According to El-Said, it is not just an issue of having to deal with the balance of payment deficit since that could have easily been covered by the available reserves. The situation and the imbalance are escalated by the added demand on dollars for speculation.
In dealing with the market, participants were unanimous in their belief that the pound must not be pegged to the dollar alone, but to a basket of currencies.
Giving an example of how the peg to the dollar has crippled the pound, Negm said that when the value of the dollar rose against the Japanese yen and the euro, it made the Egyptian pound higher in value against these currencies. In consequence, Egypt became more expensive to the likes of Japan and Europe, thus discouraging their purchase of Egyptian exports and the flow of tourists into Egypt.
The solution, as always, comes in moderation. A basket made up of 40 per cent in dollar, 40 per cent in euro, 10 per cent in sterling and 10 per cent in yen, Negm suggests, would be ideal as it would reflect the size of Egypt's transactions with the prospective countries. And of course, it would mirror a word which has remained foreign to the nation's economy for too long now: balance.
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