Friday, 22 April 2016

Egypt - Questions about the pound

Will there be a further devaluation of the Egyptian pound, asks Stefan Weichert

The Central Bank of Egypt (CBE) dealt a blow to the black market when in a sudden move it devalued the pound by around 13 per cent around a month ago, flooding the market with dollars and making it easy to buy hard currency at any foreign exchange bureau at the official rate.

Today, the situation is different, and attempts to buy dollars commercially this week were in vain. Reuters reported that the value of the dollar reached as high as LE112 on the black market on Tuesday.

It is thus likely that a further devaluation will take place soon, said Ahmed Kamaly, a professor of economics at the American University in Cairo (AUC).

“I think it is unavoidable to see a continuous adjustment in the exchange rate,” Kamaly toldAl-Ahram Weekly. He added that Egypt’s chronic balance of payments deficit is putting continued pressure on the exchange rate.

Because the CBE does not have a transparent monetary policy, this creates speculative demand, putting further pressure on the pound, he said. Those in charge “either do not learn from their mistakes or do not know what they are doing,” he said.

However, Kamaly, who previously served as economic advisor to the General Authority for Investment, finds it hard to predict how large a further devaluation will be or when it could happen.

He said it would be logical to set the official exchange rate close to the black market rate. “Egypt is in a bad situation,” he said. “If something does not happen soon to rectify the path of the Egyptian economy, we will hit disaster.”

It would be best to make the exchange rate flexible, he said, a so-called floating rate, where the value of the pound is allowed to fluctuate in response to the foreign exchange market, he said.

“Without using monetary tools effectively, the present cycle will continue with growing speculative demand and higher black market rates as a result,” he said.

Kamaly understands that there are legitimate concerns over a further devaluation or a floating currency, including higher inflation, increased government deficits and a higher foreign debt, but in the long run it would be better to devalue now.

“The CBE is trying to avoid these things by holding back on flexibility, but this is going to trigger an even greater devaluation later on because it is not handling people’s concerns and expectations well,” Kamaly said. “You need to make monetary policy transparent to signal to the market that you know what you are doing.”

Karim Kamal, head of global relationship management at the Egyptian branch of the National Bank of Kuwait, said that a further devaluation of the pound is possible.

“I don’t have a crystal ball, but we could see a devaluation if the CBE does not succeed in attracting direct foreign investment with its other tools,” Kamal said during a lecture at AUC. “But until then, we should not see a devaluation because it could hurt the CBE’s other initiatives.”

The CBE is offering various higher interest rates on hard currency deposits.

Kamal said that raising the interest rate on Egyptian pound and foreign currency deposits could help stabilise the exchange rate. However, when it came to the best way to handle the currency crisis he agreed with Kamaly and advocated a floating exchange rate as this would be better in the long term.

However, he pointed out that not everything can be fixed by the CBE, because it is hard to fix the country’s lack of income from tourism, the Suez Canal and from Egyptians working abroad.

This lack of income, one of the main reasons for the currency crisis, is partly or wholly due to external events, he pointed out.

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