Egypt mulls flexible monetary policy
Cairo - A potential move by the Central Bank of Egypt to allow the Egyptian pound to fluctuate in response to market forces would lead to a sharp rise in commodity prices, increased subsidies to the poor and open the door for public discontent, observers said.
“Economic planners think that such a move will get the national currency out of its current problems,” economist Sherine al-Shawarby said. “To them, however, I say: ‘This move will be the beginning of the problem.’”
Central Bank Governor Tarek Amer has signalled his intention to allow the value of the pound to be determined by the foreign exchange market based on supply and demand.
For decades, Cairo has controlled the value of the pound against foreign currencies, especially the US dollar, the main import currency in Egypt. Economists said, however, that policy has allowed for a parallel exchange market in which the pound is valued at a rate far higher than that of the Central Bank.
Seeking to rein in a runaway dollar, the Central Bank decided to devalue the pound by 14% in March. The action drove commodity prices up but failed to control the dollar, which sells on the black market at 12 pounds, almost 3.2 pounds higher than its value at banks.
Economic planners said applying a floating exchange rate would put the Central Bank in control of the exchange market once more, entice dollar holders to exchange them at banks, not the black market, and consequently make the dollars — now scarce — available at banks.
“This will encourage investments, encourage exports and make the machines of our factories run again,” said Ashraf al-Arabi, a member of the Egyptian parliament’s Economic Committee. “Importers and investors find it almost impossible now to find the dollars at the banks because most of the dollars are at the black market.”
Economists say Egypt has to allow a fluctuating exchange rate to make up for an acute shortage of dollars and to meet its obligations to other countries and international organisations.
Egypt had $36 billion in reserves five years ago but they now total $17.5 billion, scarcely enough to meet its imports for next three months. Worse, most of this money belongs to other countries that helped support Egyptian foreign currency reserves.
Egypt’s public debt has reached 100% of gross domestic product and the country has a funding gap of $30 billion over the next three years, according to the Planning Ministry.
This is one reason the Egyptian government is in talks with the International Monetary Fund over a loan.
The loan is believed to be important with the balance of international payments deficit hitting 14%. Exports are also falling, imports shooting up and revenues from tourism declining dramatically. Tourism revenues in April were down 74% from April 2015 figures, according to the Tourism Ministry. The budget deficit is expected to reach $34 billion this fiscal year, more than one-third of the overall budget, the Finance Ministry said.
A fluctuating exchange rate regime, however, could be a problem for the poor, almost 26% of the country’s population. When the Central Bank devaluated the pound by 14% this year, commodity prices rose 40% in local markets. Soon after Amer signaled his intention to adopt a floating exchange rate regime, the value of the dollar jumped on the black market, gaining more than a pound in less than a week.
“This is why it is necessary for the floating exchange rate regime to be followed by social welfare measures that aim to cushion the effects of the regime on the poor who are expected to suffer the most,” Shawarbi said. “We are in for a real catastrophe without these measures, especially when commodity prices move up.”
The government has slashed subsidies to bridge the growing budget deficit. This, political analysts said, is a political risk.
Egyptian President Abdel Fattah al-Sisi enjoys huge popularity but that political capital is being gradually eaten away as economic conditions worsen and the poor find it more difficult to put food on the table.
“The expected rise in commodity prices will cause deep suffering for millions of people here, which can open the door for all types of bad possibilities,” leftist politician Nabil Zaki said. “This makes it necessary for the government to keep subsidising the needs of the poor or things can get out of control.”