ECONOMY-EGYPT: Pound Floating Well, For Now

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Feb 3 2003 (IPS) - The newly floated Egyptian pound has lifted the money markets, but raised fears also of inflation and heavier import bills.

The Egyptian pound fell some 15 per cent during its first free floating day January 29, but levelled off later as it came in line with the prevailing black market rate of 5.35 pounds to a dollar. The rate has stabilised in recent days, though many people are reported to be hoarding dollars in hope that the pound will slip further.

The Egyptian pound was restricted earlier to trading within a 3 per cent band around a fixed rate of 4.51 pounds a dollar. The "managed peg" system set by the Central Bank of Egypt (CBE) was seen in the market as discouraging foreign investors and undermining export growth. The CBE had to draw periodically from foreign currency reserves to maintain the artificial rate.

Many economists say the liberalised currency will stimulate foreign investment and export revenues. "This is one of the most sensible things the government ever did," says Adel Amin Beshai, professor of international economics at the American University in Cairo (AUC). "It shows the government is willing to face facts."

The Egyptian move is in line with IMF (International Monetary Fund) recommendations. "The floating of the pound in the foreign exchange market is a promising sign of the Egyptian authorities’ commitment to proceed with market-based reforms to stimulate trade and investment," George Abed, director of the IMF’s Middle East Department said in a statement.

"We believe this move will inspire the confidence of financial markets, and pave the way for the further economic and financial reforms that the Egyptian authorities are planning to undertake," he added.

Egypt now expects its investment ratings to be raised and more IMF funds to come in.

Economist Magdy Sobhy says the decision was inevitable, and the government did not cave in to international pressure. "This is not about IMF requirements," he says. "It is about being more realistic. The price declared by the banks is now the same as the black market and this will give Egyptian industries a chance to be more competitive in the local and external market."

The 15 per cent drop in the exchange rate amounts to a 15 per cent rise in export competitiveness, says Sobhy. Industries using "local ingredients" will benefit most, he says. The textile industry which accounts for a quarter of all exports is expected to be the big winner.

The first winner, though, has been the Cairo stock exchange which saw its biggest gains in years as foreign investors returned to the market in force. The foreign exchange policy earlier had been the main obstacle to foreigners entering the market, says Shady Sharaf, head of research with the brokerage firm El-Shorouk.

The first trading session after the float saw transactions by foreigners worth 6.5 million dollars – 36 per cent of trade by value. The market continues to soar.

"Stocks that have dollar incomes are the now the most attractive," says Sharaf. The devaluation of the pound will increase the revenues of Egyptian firms with projects abroad, he says.

But not everybody is pleased with the devalued currency. Many Egyptians fear the move will spark inflation and worsen their economic troubles.

"I can barely provide for my family as it is," says Emad Magdy, a store clerk and father of four. "Prices will go up, but my salary will not."

The government is expected to raise subsidies on basic commodities to offset inflation, but Magdy says the subsidies will not negate higher costs. "Do they think we can live on bread and beans alone?" he says.

The price of imports is set to rise significantly. The Egyptian import bill last year was 14.5 billion dollars. Imports included finished goods but also raw materials for local industries. Industry leaders concerned by the devaluation are meeting this week to discuss the consequences of the currency float.

"The new rate may be good for exporters, but it is not good for the food industry," says Shehat Selim, acting general manager of the Chamber of Food Industries. "We already have many problems with the new dollar rate because most of our raw materials come from outside Egypt."

Imported raw material like sugar is an essential ingredient in many products, Selim says. The government can subsidise packaged sugar, but a rise in the price of raw sugar will affect a broad range of food products, and "consumers are going to feel it," he says.

Supporters of the free currency agree the transition will be rough, but argue it is for the greater good. The price of consumer goods may climb, but in the long run they say an expected rise in exports and an influx of foreign investment will improve the standard of living.

"People must understand that devaluation is not lowering the political flag, it is raising it," says Beshai. "This will improve the image of Egypt in the eyes of the world and restore investor confidence, which is what we really want. We should have done this years ago."