Egyptian pound rebounds, with the state’s help

Sunday 05/03/2017
Controlling the exchange rate. Egypt’s Central Bank at downtown Cairo. (Reuters)

Cairo - Egypt’s monetary policy­makers are playing a dan­gerous game to rein in the runaway fall of the Egyp­tian pound against the US dollar, triggering fears their efforts will backfire, analysts said.

The Egyptian Central Bank has been using foreign currency re­serves to make dollars available at the banks and control the exchange rate, financial analysts said.

“This is very dangerous because, among other things, such a policy will bring us back to square one,” said financial analyst Wael el-Na­has. “By using foreign currency reserves to put the exchange rate of the US dollar under control, the Central Bank is backpedalling on its decision to free float the na­tional currency and this will have adverse ramifications.”

Soon after the Central Bank free-floated the pound on November 3rd, the exchange rate of the dol­lar shot up from 8.88 pounds to 19 pounds, which more than doubled Egypt’s import bill and raised com­modity prices to unprecedented levels.

The pound flotation was among economic reforms aimed at eradi­cating a rampant foreign currency black market, boosting foreign currency reserves and winning ap­proval for a $12 billion loan from the International Monetary Fund (IMF).

A short time after the flotation, the black market shrivelled up, for­eign currency reserves rose from $19.6 billion in November to $26.2 billion in January and Egypt got $2.75 billion as the first part of the IMF loan.

As of February, however, the ex­change rate of the US dollar had come down to 15 pounds to the dol­lar.

Authorities called this a gradual recovery of the national currency, citing economic reforms and the availability of dollars. The falling dollar created a stampede of dollar hoarders at the banks, who wanted to exchange their dollars for Egyp­tian pounds.

The banks bought $800 million from Egyptians over three days in mid-February and the dollar ex­change rate keeps falling.

This, however, is far from a re­covery, Nahas said. The Central Bank is using the dollars it collect­ed in the months that followed the pound flotation to buy dollars from citizens at a low rate, he said.

Nahas calculated the $12.5 billion that entered the Egyptian Treasury in the past three months included $2.8 billion in a currency swap deal with China, the first tranche of the IMF loan, $2 billion from the sale of Treasury bonds at the Irish Stock Exchange, $1 billion from the World Bank, $500 million from the Afri­can Development Bank and $4 bil­lion from the sale of Eurobonds at the Luxembourg Stock Exchange.

Thus, Egypt’s foreign currency reserves should have increased to $32 billion from $19.5 billion in No­vember. Nonetheless, the Central Bank in January said foreign cur­rency reserves were $26.2 billion.

“This means that the Central Bank had used the missing $5.8 billion to create a greenback offer to reduce its exchange rate against the pound,” Nahas said, adding that such a move “will eat away at the reserves and bring the foreign cur­rency black market back to life”.

The Central Bank said its decision to free float the pound was final and it would not go back to the decades-old controlled foreign currency ex­change rate regime.

“We do not interfere to decide the exchange rate of foreign cur­rencies,” Central Bank Governor Tarek Amer told the private DMC network. “We cannot interfere be­cause we want to create a balance in the market.”

Cabinet spokesman Ashraf Sultan attributed the rise in the exchange rate of the Egyptian pound to re­forms initiated by the government.

“We even expect the value of the pound to increase in the future when exports rise, imports de­crease, foreign tourists come back and international trade improves, which will reflect positively on rev­enues from the Suez Canal,” he said in a telephone interview.

Nevertheless, experts argue that the Egyptian pound will pick up only when foreign currency rev­enues pick up.

“Egypt imports almost 80% of its needs from other countries, which means that there will always be pressure on foreign currency re­serves and subsequently a high US dollar exchange rate,” said Alia el- Mahdi, an economics professor at Cairo University. “This is particu­larly true as foreign currency earn­ers remain the same.”

Tourism revenues, at $14 billion in 2010, totalled only $5.6 billion in 2016. Revenues from the Suez Canal have declined. Exports, es­pecially agricultural ones, have risen 17% in the past three months but economists say the rise is not enough to bring in enough dol­lars.

“This means that there was noth­ing new to justify the decline in the exchange rate of the US currency,” Mahdi said. “We need to attract in­vestments, raise exports and bring the tourists back to get enough dol­lars for a strengthening of our na­tional currency.”