Egypt mulls flexible monetary policy

Sunday 24/07/2016
A customer counts US dollars at a bank in Cairo.

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.”