ECONOMY-EGYPT: Dollars and Dinars Sink the Floated Pound

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Jan 21 2004 (IPS) - After the new Iraqi dinar replaced the old bank notes with the effigy of deposed Saddam Hussein, Egyptians cannot have enough of the Iraqi currency because they believe it will climb as Iraq’s war-torn economy recovers.

Ragab was certain only of two things until last week: the dollar will climb, and the Egyptian pound will fall. Now he has found another certainty.

“The Iraqi dinar will go up,” he says confidently, opening a shoe box full of money he trades illegally out of a souvenir shop the size of a phone booth. “You should buy dinars now before they go up.”

The new Iraqi dinar replaces the old bank notes that bore pictures of deposed president Saddam Hussein. It went into circulation Oct. 15 and became Iraq’s sole legal currency earlier this month.

Egyptians are buying and hoarding the Iraqi currency because they believe it will climb as Iraq’s war-torn economy recovers.

Many recall the boom in neighbouring Kuwait after the first Gulf War in 1991. “People remember what happened to the Kuwaiti dinar, which traded for 25 piastres (4 cents) ten years ago after the Gulf War, but after Kuwait’s economy recovered it now reached 23 pounds (3.9 dollars),” market analyst Shady Sharaf told IPS. “Everyone has in mind that this will happen to the Iraqi dinar.”

Some Egyptians are so convinced of this that they are now travelling to Iraq and neighbouring countries to buy large amounts of Iraqi dinars on the black market.

Customs officials arrested 32 ferry passengers carrying Iraqi dinars worth about 650,000 dollars at an Egyptian port last week. The passengers were returning from Jordan.

One Egyptian flying in from Kuwait was arrested with dinars worth 38,000 dollars stashed in his luggage. Iraqi dinars were selling on the black market this week for 1,350 dinars to a dollar.

It is not a crime to possess Iraqi dinars, but failing to declare them on entry is. As is currency speculation, the reason the Central Bank of Egypt (CBE) stopped banks and foreign exchange offices from dealing in Iraqi currency.

“We had (Iraqi) dinars, but the Central Bank has forbidden all trading,” says a foreign exchange teller. “We still have dinars, so of course we want to sell them, but quietly.”

Iraqi dinars have picked up where the dollar left off. The black market for dollars has flourished since the Egyptian pound was floated a year ago in an attempt – ironically enough – to quash illegal trading.

For more than a decade the CBE had used its foreign currency reserves to maintain the Egyptian pound’s value at 3.4 to the dollar. The official peg was loosened early 2001, and the pound was allowed to creep down to 4.65 to a dollar, closer to what economists described as its “natural rate”.

In January last year Prime Minister Atef Ebeid made a surprise announcement that the pound would be floated. “There will be no interference from the government,” he said. “It is a free market.”

Freed from the artificial exchange rate for the first time, the currency immediately dropped. When trading opened the next day, the pound fell from the official 4.65 a dollar to 5.40 a dollar. It is now 6.14 to a dollar at banks and up to 6.90 dollars on the black market.

“Nobody wants pounds these days,” says clothing merchant Yasser El- Desouky. “People think the pound will keep falling so they prefer to keep their savings in dollars.”

What the government frowns upon as bordering on speculation, El-Desouky sees as sound investment.

“The pound keeps going down and prices keep going up but our salaries stay the same,” he says. “Why shouldn’t we put our savings into dollars or euros?”

Egyptians are forced to constantly seek out foreign currency. Importers need it to buy commodities, and foreign firms need it to remit revenues. And within Egypt even private schools and tutors insist that parents pay for their child’s tuition in dollars.

Amidst this situation come accusations that financial institutions and currency speculators are hoarding foreign currency to push prices up. Banks and foreign exchange offices often refuse to sell dollars, or limit the amounts offered despite a CBE ban on such practice.

“Naturally, there is a negative psychological effect when people go to the bank to change money and they are told they can’t,” says Samir Makary, professor of economics at the American University in Cairo (AUC). “People may think the bank doesn’t have enough money, and lose confidence in the institution.”

Egyptians harbour deep distrust of economic policy-makers. The government’s decision to float the pound was announced and enacted overnight, so many believe a decision to reinstate monetary controls could come in the same manner.

“The government has already interfered,” says El-Desouky, referring to a requirement since March last year for exporters and travel companies to exchange 75 percent of their foreign currency revenues at the official rate.. “Who knows what they will do next?”

And so dollars, and now dinars, go under the proverbial mattress.