A better than expected stock market performance helped cushion the pound from a sharp fall this week although experts believe it will continue to gradually depreciate, writes Niveen Wahish This week observers were bracing themselves not only for a sharp drop in the stock market but also for an equal depreciation of the pound. Things, though, worked out for the better. "At the start of this week [starting 26 March], the pound gained LE0.005 [half a piastre] which is quite significant, because it usually moves within a smaller margin," said Medhat, an employee at a foreign currency exchange company. This week it was trading at an average of LE5.97 per dollar compared to an average of LE5.98 the week before. However, on Wednesday [yesterday] it rose unexpectedly again to LE5.98. According to Medhat, since the bulk of hard currency trading takes place through banks, they lead the market and whatever rate they set, the foreign exchange (forex) companies follow suit. The pound has lost almost four per cent of its value since the revolution. It was trading at around LE5.8 before 25 January. Immediately following the revolution and the reopening of banks, it lost around LE0.1 (10 piastres) in one day but the Central Bank of Egypt (CBE) quickly came in its support. Since then, the pound has been depreciating ever so slightly. According to one banker who preferred to remain anonymous, there was excess demand for the hard currency during the past few weeks. He said it was partly driven by speculators betting on the depreciation of the pound. Part of it was also panic by importers who wanted to secure they had enough hard currency to meet their import needs. Additionally, there was a tendency by depositors to convert their pound accounts into dollars. But that panic subsided with the opening of the bourse. In fact, he says that over the last weekend, there were practically no requests for dollars. He also noted that the opportunities offered by the stock market may have encouraged many foreign and Arab investors to tap the market. In the process, they are exchanging dollars for the pound thus increasing the available hard currency. He added that the CBE has not intervened explicitly by injecting dollars into the market since the one time in early February. But he explained that the CBE's intervention does not necessarily have to be by injecting dollars, but through indirectly managing the market. Medhat of the forex company pointed out that measures taken by the CBE since the revolution have stabilised the market. These included placing a $10,000 limit on dollar cash withdrawals. He also said that there are in place unannounced restrictions on financing of certain imports that may not necessarily be urgent on the short-term, such as cars and machinery, to limit demand for hard currency. These measures, says Medhat, were taken to prevent smuggling of hard currency and to prevent panic-driven actions. "These are just short-term contingency measures. As things stabilise, all will return to normal," he said. Part of the CBE management, the banker said, is to let the pound depreciate very gradually. He expects it to reach around LE6.25 by the end of the year. But he affirmed that the fact that the interest rate on the pound is around nine per cent makes up for the depreciation. In fact, he says that it is the high interest rate that kept a wide dollarisation process from taking place because individuals would be getting zero interest rate were they to make deposits in the dollar. However, he does not think the CBE should raise interest rates further. On the contrary, he believes that as the situation stabilises, the CBE should start lowering the interest rate to give the economy a push and to encourage investments whether in projects or in the stock market. Another analyst, who preferred to remain anonymous, also sees a gradual decline in the value of the pound in the horizon. "The pound for the past week and a half has been dropping slowly but consistently," he said, adding that several factors drive in that direction. These include slow tourism, capital outflows from the stock market, lower remittances and lack of foreign direct investments. All these combined, he said, will mean a balance of payments deficit which calls for a weaker pound. A lower-valued pound is bound to reflect on Egypt's import bill and accordingly pass through to prices reflecting in higher inflation. He said that high prices are in the horizon not only due to higher oil and international commodity prices, but also because of the drop in the value of the pound. He expects inflation to reach around 12 per cent. Annual headline Consumer Price Index (CPI) inflation had stood at 10.7 per cent in February. Nonetheless, he too does not believe that an increase in interest rates is the answer. That could only be reverted to in a worst case scenario if the economy and foreign currency earners did not pick up, "otherwise, now is not the time to raise interest rates," he said.
