Too little, too late?

The pound's devaluation against the dollar has caused the much-coveted green notes to be in even shorter supply. Niveen Wahish and Sherine Abdel-Razek examine the impact of the move on the market
Only six months after the Central Bank of Egypt adopted its new managed-peg foreign exchange regime, it decided to loosen its grip on the exchange rate. Last week, the CBE announced it would lower the pound exchange rate to the dollar to LE3.9 from the rate of LE3.86 it set in January. In addition, the CBE has broadened the band of fluctuation to three per cent -- up from the previous one per cent -- 1.5 per cent on both sides of the set rate.
The move is believed to be a reaction to the demands of international institutions recently subscribing in the successful offering of Egypt's first Eurobond. Both lead managers and subscribers of the offering were understood to have asked for a more flexible exchange rate.
Only days before the move, international rating agency Standard and Poor's (S&P) lowered its rating for the Egyptian pound to BBB negative due to a number of reasons including the inflexible exchange rate regime. S&P said in a press release that the central rate, which was LE3.86 at the time, is not seen as a market-clearing rate (compared with the parallel market rate of more than LE4).
It also pointed out that the ability of the authorities to manage adverse internal and external shocks will continue to be limited in the absence of a more flexible exchange rate. The rating agency shed light on the fact that, due to underdeveloped monetary policy instruments, there is a great possibility that the CBE would resort to administrative, rather than market- based, measures to defend the exchange rate at certain levels. S&P's report follows similar reports from Moody's and Fitch IBCA describing CBE's monetary policy as inconsistent and non-transparent.
Analysts and market observers, however, hold reservations against the lowering of the pound. "This is a marginal move," said David Lubin, an economist at HSBC in London, in an interview with Reuters soon after the announcement. "Clearly, there is no change in the overall regime. It is just a tweaking, rather than a reform, of the exchange rate regime."
Lubin argued that analysts were unlikely to change their view of Egypt because of it. "This reaffirms Egypt's inclination to reform in a gradualist manner," he said.
Egypt has been trying to stabilise its exchange rate, which started to decline more sharply against the dollar in January 2001 following a gradual slide since May 2000, when it abandoned a nine-year currency peg that stood at around LE3.40 in a move aimed at stopping the bleeding in its foreign currency reserves.
Ahmed Galal, executive director of the Egyptian Centre for Economic Studies, an independent think tank, is of the opinion that ever since the CBE launched its new policy on the dollar in late January, the central rate should have been higher and the band wider. Today, Galal still thinks the dollar price rise and the widening of the band are not enough.
"It is too little, too late," he said, calling for a margin of movement of between five and 10 per cent. Nonetheless, he still believes the decision is a move in the right direction and is more reflective of the forces of supply and demand.
He pointed out that the CBE's central rate does not have to reach the parallel unofficial market price because the latter carries a premium. The dollar is traded in the black market at LE4.09.
This notwithstanding, he held reservations against the changing of monetary policies over a short period of time. "This indecisiveness in itself comes at a cost," he said.
Agreeing with Galal on this point is Mounir El- Zahid, executive director and deputy managing director of HSBC Egypt. He believes the CBE should have stood firmly by its original decision, but there also should have been strong intervention through the injection of more dollars into the market, which, he said, is the only way to eliminate or counteract the "price steering" coming out of the grey market. According to El-Zahid, administrative decisions alone will not solve the problem. Were the CBE to make endless dollar funds readily available to banks, the latter would be able to meet demand easily and the price would stabilise. He suggested the government should use part of the Eurobond revenues to pump dollars into the market.
How was the foreign exchange market impacted? The owner of a foreign exchange bureau, who requested anonymity, said the move was not only insufficient, but that it had caused more turbulence in the market. The demand on the dollar has significantly increased as people bet on the possibility of further price hikes. Since both banks and official foreign exchange dealers were unable to meet this demand, the price of the green notes jumped to between LE4.07 and 4.09 in the black market.
Although the summer season is often a time when foreign currencies are available in abundance due to the return of Egyptians working abroad for their vacations, "this year the summer season has not made a difference," El-Zahid said.
He said Egyptians are "holding on to their dollars" in hope of a possible further pound devaluation.
Meanwhile, Egyptian companies do not have the same luxury. The exchange rate instability is adversely affecting local companies with transactions or debts in dollars. Even the country's biggest caps, Orascom Telecom (OT) and MobiNil, could not escape the damage done by the escalating exchange rate. Analysts commenting on the unexpected loss incurred by OT in the first quarter of 2000 attributed it to its foreign exchange losses. The company had to substitute the bulk of its dollar-denominated debt by a local currency loan facility as a way of hedging against the increase in the cost of the dollar.
As for MobiNil, it announced last week it was working with its international advisers on the possibility of borrowing a fresh amount of funds specifically for the purpose of repaying its $220 million loan. "With regard to the $220 million loan, every one-piastre move (depreciation in pound-dollar rates) will denote a LE2.2 million loss on that loan," MobiNil's chief financial officer, Ossama Deeb, told a press conference last week.
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