Tightening the belt

The value of the Egyptian pound is under pressure again. Niveen Wahish reviews the measures intended to prevent it from sinking
It is the same story all over again. The dollar is in short supply. Those who need it are having difficulty getting their hands on it at the official rate. However, if you are willing to pay between LE4.30 to LE4.50, someone is bound to come up with the hard currency. On the other hand, if you are selling dollars, especially if it is a huge sum, finding a buyer should be no trouble whatsoever, and you will probably find buyers willing to pay at least LE4.35 a dollar.
The pound's setback began in mid-October after a short honeymoon during which its value had stabilised, even if it was traded at the weakest rate allowed, LE4.2745, at most foreign exchange bureaus. In fact, the Central Bank of Egypt's (CBE) August decision to raise the central rate of the pound to LE4.15, and to allow for a three per cent margin of fluctuation in both directions, had been applauded by observers. The CBE accompanied its decisions by aggressively and continuously pumping the currency into the market, a move aimed at reassuring the public. While the CBE ensured a steady supply of dollars, the government was counting on an improvement in the performance of foreign currency earners -- tourism, oil and exports -- to replenish its foreign currency reserves which are approximately $14 billion.
But government hopes for improvements to the economy's performance were dashed by the collapse of New York's World Trade Center. Egypt's losses resulting from the 11 September attacks are estimated at over $2.5 billion. Tourism revenues alone are expected to drop by around $1.6 billion for the year 2001/2002, and commodity exports are expected to suffer a decrease by some $1.8 billion.
With hopes of replenishing its reserves in the near future having evaporated, the CBE could not go on selling dollars to the market. In fact, since mid-October, CBE's injection of the currency into the market has been reduced to a trickle. Since then, the pound has been treading on unsteady ground and the temporarily dormant black market is back in business.
Mohamed El-Abyad, head of the exchange bureau division of the Federation of Chambers of Commerce recently tendered his resignation to protest some foreign exchange (forex) companies' failure to abide by CBE forex regulations. "These are hard times," El-Abyad told Al-Ahram Weekly, pointing out that the CBE cannot continue pumping dollars into the market indefinitely. The government should concentrate on reviving the market instead, he said.
To prevent further pressure on the pound, the CBE has decided to take a number of measures to ease demand for the dollar. In his first meeting with heads of banks last week, new CBE governor Mahmoud Abul-Oyoun recommended that banks encourage their clients to reduce imports and promote demand for local products and services. CBE governor also recommended that priority be given to financing capital goods, production inputs, spare parts and basic consumer goods, and that banks refuse to provide exchange for imports that do not fall into any of the aforementioned categories.
Abul-Oyoun also recommended that cash withdrawals in dollars from banks be limited -- a move that is aimed at avoiding speculation on the pound. Some customers withdraw their money to change it at forex bureaus to capitalise on the higher price for the pound.
Safaa Safwan, deputy general manager of the Suez Canal Bank, agreed that the CBE's recommendations would cut demand for the dollar. She believes, however, that such decisions should have been taken a long time ago, suggesting that there has long been a need for increasing the limitations on importing. Safwan recounted that she once received a request for a letter of credit to import marbles for children. "We're in a time of crisis and we should do what it takes to turn around our economy."
Safwan suggested that if the former CBE governor's decision to limit cash withdrawals to $20,000 had not been cancelled about one year ago, the current situation might be better. At that time, critics of the governor's decision had feared that the move would negatively impact on foreign investors' interest in the Egyptian market. "There is nothing wrong with putting a ceiling [on withdrawals]. It does not mean that people cannot get hold of their money. They can withdraw it in any amount they wish, but not in cash," Safwan said.
She believes that although the recent recommendations will certainly cut down on imports, they are insufficient to meet current challenges. She suggested that CBE recommendations be more precise, as well as binding -- not merely left to the discretion of banks. In the meantime, Safwan rejected a modification of the central rate of the pound for the time being. "The current central rate is already fair," she said.
Similarly Mohamed Noureddin, research manager at an Egyptian bank, believes that the CBE's recommendations will only give temporary relief. Imports cannot be restricted forever, he pointed out, referring to Egypt's international commitment to liberalise its market. He notes that while CBE's decisions are likely to reduce demand for the dollar, they will also probably spur the growth of the black market.
"The real solution is to increase exports as soon as possible," Noureddin stressed adding that in the meantime, non- essential imports must be limited. He also suggested that a return to "swap deals," by which imports from a country are determined by how much Egypt exports to that same country.
Noureddin's recommendations get to the heart of the reasons for the recent decision to create a ministry dedicated exclusively to foreign trade: to increase exports, rationalise imports and develop sources of foreign currency. Within the same framework, the cabinet has taken a number of steps to face the changes resulting from the drop in tourism, exports and oil revenues. The cabinet is introducing measures to reduce the state's importation of goods by $1.5 billion. It also aims at reducing the state's requirements of foreign currency by $1 billion until the end of the fiscal year in June 2002. This will be achieved, the cabinet hopes, by postponing purchases from abroad by the service and economic authorities until next year, with the exception of spare parts and production inputs. In the meantime, the needs of these entities are to be met by the local market.
Banks will be instructed not to provide any credit for basic food commodities, except through the Ministry of Supply. These commodities include wheat, flour, sugar and cooking oil.
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