Dealing with the pound

News analysis by Ibrahim Nafie
It is odd when economic circumstances change without a commensurate shift in society's attitudes towards certain economic policies. A case in point is the fixed exchange rate of the Egyptian pound, which to most people, including many experts, has become a sacred cow. Yet the exchange rate is never an inviolable absolute; it is, rather, a tool to be used in furthering national economic objectives. It can be wielded to help stimulate local production and exports, spur tourism and foreign investment, and to counter trade and budgetary deficits.
As a financial tool, exchange rate policy should be handled in such a manner as to neither trigger panic nor squander hard currency reserves. And as far as the Egyptian pound is concerned, the most appropriate mechanism for determining the rate of exchange would be to manage the currency's flotation in a manner that ensures that its value reflects actual market forces of local supply and demand on the dollar while ensuring that national economic goals and interests are not undermined.
Any discussion of the future of the Egyptian pound must also take into account the pressures the currency faces as a result of Egypt's chronic trade deficit. This deficit has been growing rapidly since 1997, largely as a result of imports from South East Asia, which registered a staggering 156.4 per cent increase in 1997-98 alone. Compounding the problem is the fact that the Egyptian pound is currently linked to the dollar, the strength of which against European currencies has made European imports cheaper and Egyptian exports to European countries more expensive.
Egypt's visible trade deficit in 1999-2000 stood at $11.474 billion. The cumulative deficit since 1990 totals some $85.5 billion. And while trade in invisibles continues to register positively, services, combined with remittances from abroad, are nowhere near off-setting the deficit. And while Egypt registered a current account surplus of $119 million in 1996-97, it found itself in the red to the tune of $2.479 billion, $1.724 billion and $1.171 billion in the subsequent three years.
Though these figures show a slight improvement in the current account balance, it remains essential to continue the drive to eliminate this deficit.
One of the gravest consequences of our excessive consumerism is that it erodes our levels of savings, which dropped to less than 16.4 per cent of GDP last year, significantly lower than the global savings rate of 23 per cent last year and far behind that of many other developing countries, which regularly report savings rates of between 40 and 50 per cent.
It has become abundantly clear, therefore, that patterns of consumer spending must be changed if we are to augment the capital accumulation necessary to finance new investments capable of boosting the Egyptian economy and reversing the budgetary deficits. Towards this end there are a large number of lessons we might do well to learn from the Asian experience. China, for example, was able to buffer itself against the 1997 financial crisis because of its high savings rate, its locally-driven development and the competitivity of its exports. Malaysia, severely buffeted by the financial storms of 1997, curtailed its infrastructure projects and dramatically reduced its imports, enabling it to recuperate without having to be bailed out by the IMF. Now the Malaysian economy is healthier than ever: having attained a 5.6 per cent growth rate in 1999 it is likely to have grown by 6 per cent in 2000 and currently boasts a balance of trade surplus of $16 billion. South Korea, too, through instigating a policy of strict financial rectitude succeeded in reducing its imports from $144.9 billion in 1997 to $93.4 billion in 1998, thereby putting itself back into the black, registering an overall trade surplus of $39.3 billion in 1998.
By drawing on the Asian experience the Egyptian economy, too, should be able to pass through the current bottleneck. It is essential, though, that we stop depleting hard currency reserves to sustain a fixed rate for the Egyptian pound. The only viable means, after all, to support the pound in anything but the short term is to curb imports. And this requires cooperation among the Ministry of Economy, the Federation of Chambers of Commerce and major importers. Maintaining an artificially high exchange rate only serves to protect foreign products by keeping the cost of imports low within the local market.
Allowing the Egyptian pound to float more freely is not automatically inflationary, any inflationary pressure being offset by the stimulation of demand for locally produced goods. More importantly, as demonstrated in Mexico in 1995 and Thailand two years later, maintaining an inflated exchange rate with hard currency reserves can all too easily become the quickest route to bankruptcy.
Egypt would do well to heed these lessons and adopt a more sensible policy towards the pound. We have already squandered more than enough of our reserves in keeping the exchange rate fixed.
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