The invisible dollar

By Sherine Abdel-Razek
The foreign exchange market remained quiet in the two days of trading that followed the new foreign exchange regime enforced by the government in an attempt to rein in downward pressures on the pound. Yet by handing full control of the exchange market to the Central Bank of Egypt (CBE) on Tuesday the government effectively brought down the dollar from a LE4.25 high to LE3.85.
The full implications of government attempts to bring the exchange market under its control became apparent as the Minister of Economy and External Trade Youssef Boutros-Ghali and CBE Governor Ismail Hassan announced details of the new plan to a joint press conference on Monday. The CBE, it was revealed, would set a "central" rate calculated according to a weighted average of transactions by exchange companies and banks over the previous three weeks. In addition, market players are now required to report transactions hourly to the CBE's new foreign exchange department.
Ghali argued that the new "managed peg" system, already followed by many countries, would not result in the emergence of a black market, because the CBE rate would reflect the "real" rate of the dollar.
However, dealer and public apprehensions translated into a sluggish market as both waited to see the full impact of the new policy.
"Supply is weak because people are hesitant to sell until they see what will happen in the market," said Belal Khalil, deputy chairman of the foreign exchange division of the Federation of the Chamber of Commerce and chairman of Al-Tawfiqiya Exchange Company.
Buying orders are buoyant because the CBE-set rate is much lower than the rates quoted before the government clamped down on the market, Khalil said. He added that importers should keep their buying orders to a minimum so as not to put extra pressure on the market.
In general trading was weak, with some dealers reporting a 40 per cent drop in transactions.
Ibrahim El-Mizlawi, chairman of the Misr Exchange Company, described the new regulations as "bold" but argued that setting a daily rate would not head off the development of a black market.
"To prevent that the rate has to be reassessed at regular intervals throughout the day to reflect the forces of supply and demand," El Mizlawi said.
Other experts argue that government intervention in the exchange market will defeat its purpose. Investment banker Hisham Tawfik, a board member of the Capital Market Association, strongly opposes the new mechanism, claiming that it will not only lead to illegal trading, but gives negative signals about the economy as a whole.
"The government seems to be running out of feasible economic policies," he said. "No one in his right mind will sell dollars at this price. People will hoard, forcing the government to intervene, but only after a leap in the dollar and after sending a very bad signal to foreign investors. We are telling everybody now that we have returned to a centrally-managed economy and a fixed exchange regime."
Faika El-Rifai, former CBE deputy governor, argues that for the new exchange policies to succeed Egypt will need to resort to the International Monetary Fund (IMF) for a new structural reform programme. An agreement with the IMF, El-Rifai told Al-Ahram Weekly, will give credibility to the economy that will in turn encourage donor countries and private companies to inject much needed foreign investments. The availability of such funds, she said, could serve to support the exchange rate without government intervention.
The press conference revealed for the first time that the government is considering the long-called-for peg of the pound to a basket of currencies, not just the US dollar. And according to Hassan, the CBE has been calculating the value of the pound against a basket of currencies since the introduction of the euro, but is waiting until the international currency market becomes more stable.
The new regulations stipulate that foreign exchange companies have to increase their capital to a minimum of LE10 million in the coming three months, after which non-complying companies will be closed. While Ghali did not reveal how this would help in solving the problem, the decision has taken the exchange companies by surprise. According to the current law, the minimum capital needed to set up a foreign exchange company is LE1 million.
The foreign exchange dealers division will convene on Sunday to list its objections to the government's decision.
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