Despite claims by Prime Minister Atef Ebeid that the government planned to maintain a stable exchange rate against the dollar, the price of US currency has began a gradual rise to unprecedented highs.
The phenomenon first caught the attention of local bankers and analysts in mid-August, when official bank rates for dollars rose subtly to EL3.50, from EL3.45 in July. Currently, the dollar is fetching as much as EL3.65 from local foreign currency bureaus.
For the past year, analysts and observers have been confidently predicting a nosedive in the value of the pound, disagreeing only on the extent of the devaluation. "The devaluation must happen," said one banker at a major Cairo-based bank. "It's inevitable."
In 1991, the Egyptian government unofficially - without the implementation of a currency board - pegged the pound to the US dollar as a part of the Economic Reform and Structural Adjustment Policy, the main goal of which was to secure the value of the pound against the dollar.
So, for the last ten years, the government has maintained a 'managed float' of Egypt's currency, carefully monitoring pressure on the pound, and releasing dollars from its reserves (which stand at approximately $15 billion according to a US embassy report published in July).
But because of a series of macroeconomic upsets which bedeviled Egypt at the end of the last decade and contributed to the steady erosion of reserves, the time for devaluation has come, ready or not.
Foreign exchange receipts for 1998, when imports climbed to $16.9 billion, and the 'Luxor incident' of 1997, which ruined the tourism sector for two years, both made the specter of eventual devaluation a reality.
"Several external problems that were outside of our control happened at the same time," one Cairo-based economist told Business Monthly magazine. "And then talk about devaluation further reduced trust in the pound." Government spending on enormous 'megaprojects', like the much-touted Toshka land-reclamation scheme and the East Port Said shipping terminal, also helped deplete reserves. Meanwhile, local sarafs (money exchangers) have said that they are not worried about the increasing price of the dollar. "We've been expecting this for a while," said one saraf in downtown Cairo. "Right now, we're just responding to the market, playing it day by day."
As to where this trend of devaluation will finally stop, opinions vary. David Shelby, chief economist at the brokerage firm EFG-Hermes, doesn't believe that further devaluation is likely.
The recent movements of the Egyptian pound are a response to market forces which include psychological factors that are hard to quantify," he told the Cairo Times [7-13 Sept.].
"But in general, the economy is doing fairly well. There has been a large influx of foreign currency recently, and rising tourism and exports revenues as well as renewed investor interest in Egypt would suggest that the liquidity crisis is nearing its end. There might even be a return to lower rates in the coming months, as economic recovery makes its impact."
An associate at HC Securities Brokerage, Neshwa Salah, says that currency devaluation is the smart play. "If they devalue by five percent, this will be seen as a positive move by the government, and we will immediately see lower interest rates, which will encourage investment."
She goes on to say that goods "will become more expensive, but that would happen anyway - whether or not we devalue."
Lamees Al-Hadidi, who writes a column in Cairo's leading financial daily Al Alam Al Youm, disagrees. "I'm really against any devaluation, as it will negatively affect the economy as a whole," she told Business Monthly. "We should devalue, but only according to market demand. Devaluation will push our exports, but it shouldn't be abrupt."
Devaluation isn't a cure for the recession and its accompanying 'liquidity crisis,' she said, adding that "the pound should be left as it is - not 'fixed' at a value that isn't real. We're still fixing the currency to the dollar when we should be leaving it to market trends like supply and demand. The central bank must loosen its iron fist on the pound."
Others are saying that this time is as good as any to go through the painful - but seemingly - inevitable process of depreciation; that the government needs to adopt a more flexible exchange-rate policy which reflects real currency values - especially now, while Egypt still has a relatively comfortable cushion of foreign-exchange reserves, low inflation and a minimal budget deficit. "Egypt has an exchange rate that no one believes in," said Taher Gargour, a Middle East equities analyst at HSBC in Cairo.
"We've said before that it's good to devaluate." While the decision of the US Federal Reserve Board in 1999 to increase interest rates - further buttressing the dollar - helped cure various recessions in exporting countries like Malaysia, it served to damage the more precarious economies of import-oriented countries like Egypt, which relies more on foreign investment.
As Egypt's current account deficit can only be remedied by an inflow of capital (in the form of investment), some economists have called for further currency devaluation in the hope of drawing more investment from abroad and spurring Egyptian exports by making them more affordable. "Devaluation would help us become more competitive and it would attract foreign investors," said Gargour. "No one questions Egypt's potential, but devaluation would spur growth."
Some recent good news, however, like a revitalized tourism sector (which made $3.2 billion in the first three quarters of the 1999/2000 fiscal year) and an improvement in the balance of trade (particularly petroleum) have contributed to a growing feeling here of optimism. And, more importantly, this good news has been manifested in May's increase of the foreign exchange reserves to $15.068, up from $15.004 the month before, according to central bank figures.
"The decline in the reserves has been decelerating for months due to improved monetary conditions," says Shelby. "That the reserves are finally going into positive figures is a result of that trend." As for the seeming contradiction between the country's improving economic condition and the ongoing devaluation, Salah says they're not necessarily mutually exclusive - the increase has simply not had time to relieve the pressure on the currency. "In an economy," she said, "you need a lot of lead time." –(Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com )