CAIRO: Increasingly over the past few months, talk of a currency war breaking out between major economic powers has been common in policy circles, said Magda Kandil — the executive director and the director of research at the Egyptian Center for Economic Studies (ECES) — on Monday. Kandil presented the dilemma as well as policy recommendations to guide the Egyptian economy through such unnerving economic times at a conference in Cairo entitled: “Currency Wars: Implications for Egypt.” Tensions have been mounting between the major economies of the world over claims of currency manipulation — or competitive devaluation, according to economists — by both China and the US in a drive to maintain or stimulate economic growth figures on the back of exports in each respective case. The situation reached new heights when the US Federal Reserve decided in late 2010 to engage in a monetary program termed ‘quantitative easing,' which was launched in the hopes of bringing the world's biggest economy back on track. There are mounting fears that this move, which has devalued the greenback in an attempt to bolster US exports, may be creating a currency war between the US and China. The US has consistently criticized Chinese monetary policy, which has sought to devalue the yuan so as to maintain the strength of their export-oriented economy; the result of which has augmented the already significant trade imbalance between the two, Kandil stated. According to her, as well as a growing chorus of others, there is a concern on the part of emerging economies that price bubbles may sprout up in emerging markets in sectors like real estate. This would be spurred by investors chasing higher interest rates than can be found in the US, which have hit rock bottom — nearly 0 percent, thanks to the flush of cheap dollars that were injected into the US economy by the US Fed. Kandil and others at the conference addressed the implications of this trend on Egypt, as well as which policy tools must be pulled out of the monetary shed once specific hurdles come to the forefront. ECES' executive director strongly advocates firm attention and action to “contain” inflation rather than simply adjusting the value of the Egyptian pound, which has witnessed consistent devaluation in the past several months. Thus, Kandil concludes that this is testimony that Egypt's Central Bank has de facto entered the currency war that has begun to play out amongst the world's economic titans. However, according to ECES research, the result of the Central Bank's policy is proving ineffective, as it seems to be defying traditional economic theory. Without strategic action on the part of the Central Bank of Egypt in the context of an international currency shoot-out, Kandil said, in an attempt to plug Egypt's fiscal deficit, interest rates will be kept high enough to attract capital inflows, which will lead to increased liquidity on the market, thus spurring inflationary pressures while generating price bubbles. This will, in turn, drive the real appreciation of the exchange rate of the Egyptian pound, leading to increased imports coupled with decreased exports. Such a scenario would equal a widening of the trade deficit as well as the current account deficit, all of which would lead to a sharp drop in Egypt's competitiveness, Kandil noted She listed a set of policy options that, in ECES' view, will shield Egypt from this occurring. She noted that it is critical to manage capital inflows, policy adjustments through fiscal consolidation aimed at decreasing the risk premium in interest rates, bolstering the number of trade partners and agreements, as well as “prudential oversight” to ensure financial stability. Furthermore, with regard to managing the currency, Kandil sketched out two paths to follow: engaging in currency warfare or strengthening the pound's value. In the first instance, Kandil asserts that doing so could increase inflationary pressures, threatening Egypt's competitiveness; thus, exchange rate policy should “aim at striking a balance, in line with domestic priorities.” She added that, in fact, “depreciation may not stimulate export growth.” Should those in control of monetary decisions strive to strengthen the pound's value, Kandil believes that it would curb inflationary pressures and the cost of intermediate goods. She advocated, amongst others, expanding trade relations through bilateral and regional agreements, as intertwining countries' economies would help buffer against a currency war, adding that policy priorities “should target the exchange rate in line with underlying fundamentals.” Mohamed Ozalp, CEO of Blom Bank, pointed out that the current global imbalance transpiring is highly unsustainable, especially when taking into consideration that the US deficit is projected to reach $14 trillion by 2012. Given such an astounding figure, should many of the world's creditor countries stop buying US T-bills, the US economy would collapse, he underscored. Furthermore, the US, along with other fiscally irresponsible European countries, such as Spain, should be considered, according to Ozalp, “too big to save,” a spinoff of the widely used phrase “too big to fail,” referring to the major banks that collapsed such as Lehman Brothers, which were considered unshakable financial institutions that collapsed with little notice. As such, echoing Kandil's assertion, the key to rebalancing global accounts so as to protect the health of the international economy and eschew protectionary measures and isolation, is a return to sound fiscal policy. In spite of Ozalp's seemingly doomsday rhetoric, he remains confident that a full-blown currency war is unlikely, because “the consequences will be catastrophic” and “everyone will lose.”
