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Could the official reduction in the value of the pound by one piastre be paving the way for a more drastic devaluation? Niveen Wahish investigates
"The needs of travellers are readily available." That is a phrase well-known to the Egyptian public. For more than a year, as Egyptians have scrambled to find enough dollars or any other hard currency, to take abroad, it has taken on a rhetorical quality.
These days it is in the air again. The pilgrimage season is only a month away, and the first pilgrims leave for Saudi Arabia at the end of the month. Central Bank of Egypt (CBE) Governor Mahmoud Abul-Oyoun has assured the press that individual travellers, upon presentation of a passport with valid visas, will get all the hard currency they need.
But that is not, in fact, the case. Although it has only been a month since the pound's central rate moved from LE4.15 to LE4.50, the pound still trades at over LE5.20 on the black market. And last week's decision to raise the central rate by one piastre (from LE4.50 to LE4.51) has done nothing to calm fears. Instead, it has renewed market dread that the CBE's response is well short of market needs.
Hani Tawfik, chairman of International Investors, a private company, considers the one- piastre depreciation "insignificant." He thinks it would have been better had the government not moved the central rate at all. Instead, the move merely shows that the government is unable to absorb the currency's variations. "The government is putting off the problem by not acting immediately," Tawfik added. He argues that the longer it takes the government to price the Egyptian pound at its market value, the more credibility it loses. And, as any economist will tell you, confidence in a currency is substantially a matter of perception. "The value of the dollar will continue to rise [against the Egyptian pound] until the credibility of the government is restored," observes Tawfik, concluding that "the heart of the problem is that individuals no longer trust their present and believe that their future will be darker."
Some, even within the government, agree with Tawfik's view that piecemeal devaluation is wrong, though they may balk at his opinion that the pound should devalue to its black-market rate. An official who declined to be named, doubted whether it was right for the CBE to keep caving in to the pressures of speculative demand.
Tawfik, however, thinks that whether governments like it or not market forces will always impose a price based on supply and demand. He argues that the Central Bank's jerky policy feeds speculative demand and encourages people to hoard dollars. "This part of demand should be eliminated," he observes. Instead, once the demand for dollars for speculative or savings purposes is met, "real" demand, (currency for import or export) can be determined.
On a similar note Mohamed Taymour, chairman of the board of EFG-Hermes, said during a recent conference that the existing forex system is good, but that it is not properly used. "People must feel that the value of the dollar is modified in relation to the market so that the situation improves," he said.
Though the one piastre change in the CBE's central rate may be insignificant, it is not meaningless. Some observers think that the CBE's move is designed to pave the way to further devaluation later on. Although a CBE official recently told Reuters that no further devaluations are planned, Reuters also reported the view of British-based bank group HSBC that Egypt would be under pressure to devalue again sooner or later. "In the longer run, a greater degree of exchange rate flexibility seems very likely. The current regime seems unsustainable," the report said.
It might be sooner rather than later. Observers believe that international donors, scheduled to gather next month in Sharm El-Sheikh at the World Bank's Consultative Group meeting (which will look at procuring Egypt $2.5 billion worth of aid to face the fallout of 11 September), will pressure the Egyptian government to adopt a more flexible approach to the foreign exchange rate.
Indeed, the international pressure on Egypt to do so is strong. International Monetary Fund (IMF) officials, speaking on the IMF's annual review of Egypt's economy, were reported by Reuters late last year as saying that forex flexibility is needed to help Egypt "ride out periods of market turbulence, while avoiding further significant declines in official reserves."
Keeping foreign reserves safe is also the goal of the government. In mid-December, when the pound's core value to the dollar was moved from LE4.15 to LE4.50, Prime Minister Atef Ebeid said that the CBE would pump the needed dollars into the market, but not at the expense of Egypt's foreign reserves. Those, according to Abul-Oyoun, stood at $14.2 billion in June 2001, "enough to cover 10 months of imports even if Egypt does not receive any export revenues."
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