Weak Egyptian pound is good, but it’s not weak enough

The Central Bank of Egypt’s devaluation of the pound a few weeks ago was an excellent move, but did not go nearly far enough. What we need is a bounce.

At a time when Egyptians are reeling from four years of political turmoil, the central bank should be praised for keeping a steady hand on such a potent symbol of state as the national currency. It is rightly concerned that a weaker pound would mean consumers would have to pay more for imports, pushing up inflation.

But the pound’s overvaluation since the 2011 uprising, when the supply of US dollars from tourists and investors dried up, has been a constant drag on the economy. An overly expensive pound has priced many Egyptian exports out of the international market, spawned a cumbersome bureaucracy to allocate scarce dollars and cost the government billions of dollars a year to prop up – dollars that could more wisely spent elsewhere.

In the last half of January, the central bank let the pound slide by about 6 per cent to 7.63 against the dollar. For the previous 18 months, it had effectively pegged it at about 7.18. Even at the new price, however, banks still do not have enough dollars for everyone who wants them.

We have been through this before. In 1997, the Egyptian economy was buffeted by a triple whammy of shocks – the economic crisis in Asia, a collapse in the international price of oil and the November massacre at Luxor’s Hatshepsut Temple, where 58 tourists were killed. The inflows of foreign currency from investment, oil exports and tourism were hit hard all at once.

Rather than let the currency weaken to reflect its suddenly lower value, the government at the time tried everything at hand to support it. It imposed a 100 per cent reserve requirement for letters of credit for imports. It restricted the purchase of foreign exchange. It closed down money changers.

It even allowed money supply to contract by 3.7 per cent over a mere six months to keep the pound strong, a monetary policy not too unlike the one followed by the US Federal Reserve on the eve of the Great Depression.

The result was a disaster for the Egyptian economy. Investors and anxious Egyptians working in the Arabian Gulf countries stopped bringing dollars into the country. Businesses could not finance imports. Real estate prices plummeted.

By insisting on a supporting the currency at all costs, the government made the recession far worse and far longer than necessary.

In the end it was still forced to let the pound slide, even as it drew down its foreign exchange reserves to dangerous levels and raised interest rates. From 2000 to 2003, the pound weakened to 6.20 to the dollar from its previous 3.45 – and on the black market fell by even more.

When the pound was finally floated in 2004, it bounced back, strengthening to 5.90 to the dollar. The central bank, reversing previous policy, began buying dollars to keep the currency weak even as demand for pounds grew. Within eight months businesses and individuals had shifted $9 billion into the Egyptian currency. The economy boomed, and by 2010, foreign reserves had shot up to over $35 billion from a low of $14bn in 2002.

At the Sharm El Sheikh conference on Saturday, the central bank declared that the recent devaluation had eliminated the black market entirely.

But many importers complain that is because they are now unable to get foreign currency at all. Among central bank regulations added last month was a limit on the amount of dollars customers could deposit in banks. Importers would previously withdraw pounds from the bank, convert them to dollars on the black market and put them back in the bank to open letters of credit. Now they cannot.

The central bank in January also warned money changers only to exchange currency at official rates.

Businesses have been choking on endless paperwork. One Cairo-based exporter said he could not unload three cargoes of Egyptian oranges in Hong Kong for two days in early February because of the new procedures. He had to scramble to get dollars to the freight forwarder to avoid extended demurrage charges ahead of the lengthy Chinese New Year holiday.

An importer of computers, essential for business, said he now could not bring them from abroad.

PMI data from Markit showed a sharp fall in economic activity in February, possibly because of the new restrictions.

Although it is true that a high currency holds down the cost of some imports, the cost of office equipment, consumer goods and anything else not on the central bank’s list of “strategic commodities” goes up when bought at black market prices. Their extra costs are reflected in the cost of goods you buy in stores.

If the pound were allowed to weaken to below market rate, people would then see that prices of Egyptian goods and services were relatively cheap and begin buying, creating demand for the currency, causing it to strengthen.

Such a bounce would restore confidence in the currency all round and boost exports, creating jobs in textiles, food and other industries. Other countries, China prominent among them, have long kept their currencies artificially weak to spawn an export industry. Egypt might follow their example.

Patrick Werr has worked as a financial writer in Egypt for 25 years


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