Is a depreciation of the Egyptian pound waiting to happen? Niveen Wahish finds out In October, at the peak of the financial crisis, the Egyptian pound started losing ground against the dollar, reaching LE5.6 per dollar, as compared to LE5.3 in July. Since, it gained ground once more to settle around LE5.5. But observers believe that at this point in time, amidst the global slowdown, even at LE5.5 per dollar, the Egyptian pound is over-rated. One observer who preferred to remain anonymous believes that although there is no evidence of a Central Bank of Egypt (CBE) intervention to maintain the value of the pound, it is not logical that the rate has only faltered, despite the huge pullout of foreign portfolio investments, estimated at $16 billion by investment bank EFG-Hermes. Exporters and those in the tourism business are the keenest on seeing a depreciation of the pound. Galal El-Zorba, head of the Federation of Egyptian Industries, recently told Al-Ahram Weekly he wants to see something done about the exchange rate. Likewise Magdi Tolba, former head of the Egyptian Export Councils, believes a depreciation of the Egyptian pound is in order. "Countries around us have let their currencies depreciate," Tolba said, citing the latest example of Turkey, which let its currency fall by 30 per cent in November. "We do not need such a drastic cut. A 10 or 15 per cent depreciation would be enough," said Tolba, adding that if market forces are allowed to manage the value of the pound, there will be speculations that could cause it to drop further. To him this move is necessary for the whole economy, not merely the export and tourism sectors. A weaker pound would mean that Egyptian products will sell for less in international markets. And Egypt would be an attractive cheap tourist destination particularly at a time holidaymakers will be running on tight budgets. Indeed observers believe that depreciation is bound to happen anyway. Head of Research at EFG-Hermes Wael Ziada says there are various factors which could lead to the depreciation of the Egyptian pound. Foremost among them is pressure on the balance of payments and the current account. He pointed out that in the past few years Egypt has been running a positive current account in terms of a healthy trade balance, high foreign direct investments (FDIs), tourism and Suez Canal revenues. "This is beginning to change," Ziada said, referring to the fact that the global slowdown will impact FDI inflows, tourism revenues as well as traffic in the Suez Canal. As a consequence, "we cannot expect the same hard currency inflows. That ought to pressure the value of the pound." The preliminary conclusions of the IMF's 2008 Article IV Consultation also point in the same direction. They showed that the sharp reversal of portfolio flows during the second quarter of 2008 put pressure on central bank reserve assets and the exchange rate. "Looking ahead, the external current account deficit seems set to widen through 2009/10 as exports decline sharply; and while still high by historical standards, FDI inflows are unlikely to be sufficient to prevent a moderate decline in [CBE] net international reserves. Moreover, there is the risk of further capital outflows in the near term given the ongoing turbulence in the global financial markets," the conclusions said. Meanwhile, Ziada acknowledged the fact that exporters may be particularly interested in seeing a depreciation of the pound because a strong pound negatively affects their exports' competitiveness in Egypt's main markets, namely Europe and the US. However, he also added that depreciation is bound to cause an increase in the price of capital goods and production inputs as well as food products of which Egypt is a net importer. But he said that the increase in food price could be balanced by the fact that commodity prices have dropped worldwide, in which case the consumer would not feel the effect of the depreciation. A note issued by EFG-Hermes put the end-2009 target for the Egyptian pound at LE6.2 per dollar -- an 11 per cent depreciation over the next 12 months. Amr Bahaa, director of Treasury and Capital Markets department at Piraeus Bank Egypt, reiterates a similar opinion. To him the value of the pound is bound to drop in light of the current situation, or Egypt will be left with a distorted situation as was the case before the pound was floated in January 2003. He wants the value of the pound to be determined by market forces, without any interventions. He believes Egyptian exports should seek to make quality their strong point, rather than price. What he is worried about is how imports, particularly food, will be affected especially in light of what he dubbed "the failure by the government to make sure the drop in international commodity prices is felt in the local market." Tolba, however, is not worried about imports. To him, an increase of 10 to 15 per cent in the import bill is nothing to worry about. In his opinion that increase will help rationalise unnecessary imports and tilt the balance of trade in favour of exports. And in the case of capital goods or production input, he believes this will serve in filtering out all the industries which have no added value. With so many consequences to be taken into consideration, Bahaa believes a depreciation should not be taken lightly. "The CBE is in a very difficult situation particularly since it has to keep its eye constantly on all indicators particularly inflation." Nonetheless, he does not believe the current management of the CBE will make the mistakes of their predecessors by providing unfounded support for the Egyptian pound.
