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das float the government surprised everyone with a sudden declaration that the egyptian pound would be set loose in the sea of supply and demand. but is it as laissez-faire as it seems? by adam morrow on january 28, egypt’s long-skewered monetary universe got the shock of its life when prime minister atef ebeid announced – at an exclusive conference organized by the economist group – that, as of 8am the following day, the local currency market would go into total, unrestricted free float. “in foreign exchange, beginning tomorrow, there is a free market where the rate is set by the market,” ebeid said, rather cryptically. “there will be no interference from the government – it is a free market.” there was a short burst of applause, although the reaction wasn’t as overwhelming as it would have been had the message been clearer. many attendees turned to one another in confusion. “did he say it?” people could be heard asking. “did he just devalue?” crossing the rubicon it was as though the pm himself was reluctant to say it. after all, the news was far more radical than the previous central bank of egypt (cbe) step-by-step monetary strategy, and went beyond even the earlier, more aggressive devaluations of 2001/02. what’s more, it seemed to take everyone by surprise. some attendees – even high-level government officials –
were visibly taken aback by the pm’s announcement, running
hurriedly to the sidelines to make strings of calls from their mobile
phones. the cbe now recognizes the unfeasibility of a rigid exchange rate, the governor said. “the cornerstone of a successful introduction of a smart monetary policy is a free exchange rate.” he went on to explain the rules. the cbe, he said, would compile a database of all official forex transactions and their various prices on an hourly basis. daily at 4pm, this information, collected with the help of new, automated technologies, would determine an average rate, weighted according to trading volumes. “the cbe will then use this weighted average, which will change from day to day, and send it to the customs authority, which will abide by this rate,” he said, adding that the average would be adjusted again each morning. “such a system will facilitate the free flow of foreign currency into the country,” abul-oyoun said, adding that the float represented “a once-and-for-all movement, in line with what’s happening globally.” the pros & cons of the regime mahmoud mohieldin, economic committee chairman for the national democratic party (ndp) and senior adviser to the minister of foreign trade, spoke on the second day of the two-day conference, putting the new monetary policy in the wider context of the party’s economic liberalization strategy. mohieldin appeared thrilled over the new policy, which had gone into effect that morning. the move, he told business monthly, was the result of revolutionary changes within the ndp at its eighth general congress in september 2002. the free monetary policy, mohieldin said, was first presented to the party last august, in the form of a little known but highly relevant “economic directions” paper, which looked favorably on setting the currency market free. the previous system of self-delusion – in which vast tranches of cash (as much as $500 million at a time) were siphoned from the national reserves to protect the local currency – cost the country around $6 billion over the long haul. “so,” said mohieldin, “we’ve gone back to the basics – supply and demand.” he predicted quick results. “if the market behaves as we expect, the benefit of the devaluation should be immediate,” he said. “more dollars will come in. our economy’s reputation will improve.” ultimately, “there are pros and cons in every exchange rate regime,” he admitted. “every kind of regime comes with a price. but the outcome of a free market must be beneficial for any country.” he closed with a parting shot at opponents of liberalization: “opposition members who say ‘the integrity of the egyptian pound must be defended like the flag’ need to take economy lessons.” the washington connection as the news broke in egypt, some of cairo’s biggest political personalities – presidential adviser osama al-baz, foreign trade minister youssef boutros-ghali and chief of the newly created policy committee gamal mubarak – were in washington for a chat with equally big names in the us administration, reportedly to discuss a possible us-egypt fta (see story, page 32). the three met with national security adviser condoleezza rice and vice president dick cheney at the white house; with undersecretary of defense paul wolfowitz at the pentagon; and with deputy secretary of state richard armitage at the state department, according to the february 10 edition of the washington post. the egyptians also made a request for an additional aid package to defray anticipated costs of a us-led war with iraq, in line with similar requests by other frontline states. washington is considering an israeli appeal for $2 billion in new military assistance and $10 billion in loan guarantees, while jordan has been promised more than $1 billion, along with several f-16 fighters to sweeten the deal. turkey was also being wooed with billions in aid, but, as of press time, continued to hold out for more. the timing of the float announcement, therefore, led some observers to believe that the currency float was motivated by politics as much as economics. as recently as january 9, boutros-ghali had stated that a devaluation was unlikely in the foreseeable future. still, egypt’s inflexible exchange rate regime had long been considered the most egregious deterrent to foreign capital. the big international donor funds incessantly complained about it, and rating agencies punished egypt’s standing among investors because of it. washington was overjoyed by the devaluation. on february 6, catherine novelli, assistant us trade representative for europe and the mediterranean, “praised egypt for recent steps toward improving its trade and investment climate, and pledged the united states’ commitment to deepening its economic partnership with that nation and the middle east region as a whole,” according to a us state department press release. novelli commended boutros-ghali – who joined her in washington in a panel discussion on us-egypt trade relations – for spearheading egypt’s recent “bold step of floating its currency.” at the same time, the move may have opened the way for egypt to take emergency aid in the event of a regional war. at a much-trumpeted sharm al sheikh donor meeting a year ago, the imf, world bank and the african development fund had offered cairo loans worth some $2 billion in quick disbursement funds, intended to help the country cover its balance-of-payments deficit in the wake of september 11, 2001. but there had been a catch – the loans came with the understanding that egypt would reform its lopsided monetary policy. cairo declined, fearing tough reforms of the kind the imf imposed on argentina after the economy there crashed. was the decision a result of a request from the imf? the answer, according to the cbe governor, is no. “this was our decision,” he said, “and it’s for the good of the country.” a high-level british diplomat also dismissed the suggestion of a “deal” per se, although he conceded that the timing of the announcement might be related to the situation in iraq. he added that with the currency float, the main condition attached to the aid promised at sharm al sheikh had been fulfilled. a us official, in contrast, suggested that the step was taken with a us free trade agreement (fta) in mind. he added that only a handful of specific customs-related issues would have to be addressed now for egypt to be at least eligible for fta talks. what's it got to do with the price of tea? the float certainly had its short-term perks. the bourse, for example, was instantly gratified, with the benchmark hermes index surging 12.7 percent by february 2 to hit its highest point in almost two years. even companies not seen as beneficiaries of devaluation gained. flotation will affect the economy’s multifarious markets in different ways, for good and ill. but the bigger question remains: how will it affect the masses? emerging economies with free-floating currencies – like brazil, argentina, mexico and turkey – have had to grapple with runaway inflation, which is generally linked to high external debt. egypt, with comparatively lower external debt, is not expected to share the same fate, but it is bound to see at least some prices rise. the country is, at the end of the day, a net importer, and currency devaluation will raise the cost of imported goods. egypt is one of the world’s biggest wheat importers, and a major importer of sugar and rice – all subsidized commodities. this means the government is set to take major losses, as it will be fearful of passing the added costs on to the populace at large. “while questions on inflation are important,” they are “still premature,” a cbe official told the british foreign office. for the opposition press, though, it’s never too early to talk inflation. a headline in the february 2 edition of nasserist weekly al-arabi proclaimed the devaluation “national suicide.” a little more soberly, the accompanying article predicted that “all egyptians will have to pay more as a result of the increase in the cost of imports, in addition to the fact that a large portion of local products will become more expensive due to their reliance on intermediate goods and machines coming from abroad.” moustafa zeki, head of the importers’ department of the union of chambers of commerce, agreed. “all imported goods will increase in price, as well as all the local commodities that require imported components,” he said. “and unfortunately, such components represent about 50 to 60 percent of local goods.” even sayeed sheesha, head of the port said customs authority, predicted heavy inflation. “the customs exchange rate for the dollar now follows the free exchange rate,” he said, “which implies an increase in the cost of imports and, consequently, the price of almost everything in the local market.” a walk through the markets of cairo’s medieval bayn al qasrayn district confirmed such fears. within days of the devaluation, prices – of both imported and locally manufactured goods – were noticeably on the rise. “the prices of all commodities are increasing chaotically,” said magdi hassan, a wholesaler in bayn al qasrayn. “the prices for some things have actually changed three times in a single day.” the price of 20-kilogram cartons of tea, for example, had risen from £e 286 to £e 330; 25-kilogram bags of rice increased from £e 32 to £e 40. flour increased by £e 0.5 per kilo, while sugar and rice both jumped more than 30 percent, to £e 2 per kilo. vegetable oil appeared to be about 25 percent more expensive than before. the prices for imported dairy products also went up, along with their local equivalents, which contain imported powdered milk. “some local cheeses use imported powdered milk,” explained mahmoud ameer, a seller of dairy products. “the prices for such products have increased by about 15 percent.” falamank (yellow cheese), he said, jumped from £e 21 to £e 25 per kilo, while a kilo of cheddar went from £e 11 to £e 14. some imported medicines, too, have reportedly seen steep price increases, while others have disappeared from the market completely. some observers also warned that the float offered unscrupulous traders a chance to play at commodity speculation. “the coming days,” zeki said, “will witness manipulations in the market by some merchants, who will store up on specific goods then resell them after the prices increase.” but the religious season must also be factored into the equation. regardless of currency pressures, prices of many food items always go up during the muslim eid al-adha holiday. a sheep this year cost around £e 750, compared to just £e 500 last year – but this had been observed before the currency float. inflation aside, former economy minister sultan abou ali maintained that the timing was “inappropriate,” since there is “already a gap between supply and demand for the dollar.” the government “should also have considered the pilgrimage season, when demand for dollars is very high,” he added. show us the money but is it all for real? the move seems a strikingly radical departure from the government’s previous slowly-slowly routine. and one thing remains to be seen – namely, the money. in the first couple of days after the announcement, banks proudly displayed their new exchange rates, ranging between £e 5.30 and £e 5.50 to the dollar. but in fact, such prices remain firmly in the realm of the theoretical. while bank tellers verified that the prices on the screen represented real exchange rates, there were no dollars – or any other form of hard currency – to be had. by the first few days of february, rumors had sprung up in the foreign business community that “the prime minister’s office was phoning all the bank chairmen,” urging them to keep their forex rates from getting out of hand. one british banker said he was “not sure much has actually changed,” with forex still in short supply. but the climb of official prices for the british pound sterling to nearly £e 9 in the first week of february could suggest that there was less pressure to control the rates on non-us hard currencies. in any case, there appears to be less forex available than ever. last year, bank clients were able to change up to $1,000 worth of local currency at official rates, as long as they could show the intention of traveling abroad by presenting a valid passport and airline ticket. by early this year, the usual amount released had shrunk to around $500. but as of february 10, banks were limiting it to a mere $200 (or the equivalent in euros). a teller at hsbc in zamalek agreed that the situation was “worse than before” the currency float. with legal dollars still elusive, the black market has survived, keeping just out of range of the official rates. illicit trades were reportedly being made towards the end of february in the neighborhood of £e 6.0 to the dollar. oxymorons “completely free,” then, must be taken with a grain of subsidized salt. as market watchers wait anxiously to see how low the guinea will sink, the government appears to have struck a compromise: a “controlled free float,” with an unspoken ceiling of roughly £e 5.5 to the dollar. despite the glaring contradiction in terms, this may still pass
(with foreign critics) as a serious move towards a freer market,
while preventing a total currency collapse (the bugbear of local
nationalists). |
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