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LETTER FROM THE EDITOR

The float that came out of nowhere

In this issue of Business Monthly, economist Ahmed Galal of the Egyptian Center for Economic Studies (ECES) says that we don’t need to worry about inflation, even with the new free float policy for the Egyptian pound. Galal argues that Egypt is different from Mexico, Brazil or the various East Asian countries that have suffered runaway inflation after setting their currencies free.

One reason is the lack of wage indexing, whereby wages must rise in step with prices – a major contributor to steep inflationary spirals. Another is the government’s assurance that it will keep subsidies on staple foods intact, in the hope that higher customs revenues will offset higher foreign-currency costs.

In Egypt, which has a history of low inflation under the old fixed exchange rate regime, Galal predicts that the inflation rate will rise “at most by 1 or 2 percent,” to level off at around 5 percent per year.

In purely rational terms, Galal could be right. But as he himself admits, human psychology can make markets work in ways they shouldn’t.

Elsewhere in this month’s issue, you’ll find quotes from people in the marketplace – and they give a completely different picture. A grocery store owner accuses wholesalers of taking advantage of the situation to jack up prices. He has had no choice but to pass on some of the increases to “angry” customers, he says.

Ask a wholesaler, and he’ll tell you that commodity prices have been fluctuating madly since the sudden, surprise announcement of the pound’s flotation at the end of January. Importers, meanwhile, continue turning to the black market to meet their hard-currency needs.

Somewhere along the line – probably everywhere along the line – suppliers and consumers are engaging in speculation, hoarding either hard currency or commodities in anticipation of further devaluations. The subject gets touchy, especially in conversations among importers and bankers, who – the minute “speculation” is mentioned – are apt to start questioning each others’ patriotism.
The point they miss is that speculation is normal and even desirable in a free market. But in newly freed markets its ill effects tend to get out of hand. People are fearful of the newly liberalized currency market, so they continue holding on to their dollars.

According to Galal, the government needs to show restraint at times like these – to hold off from restricting imports and resist its own desire to hoard foreign currency. Given time to work, the free market will demonstrate its advantages. “It is a learning process, but the market will settle down,” he promises.

This certainly doesn’t sound like the “national suicide” proclaimed by the rabidly anti-devaluation Al Arabi on February 2. Too bad the academic musings of the ECES head aren’t available to the general public in a more accessible form. But aside from the principle of defending the pound, the Nasserist paper also objected to the way the free float was announced: at a “secret conference” of investors, closed to the press and the public.

Of course devaluing suddenly, without much advance notice, makes sense from the perspective of discouraging speculation. Yet at the same time, maybe the public would be less inclined to panic if the announcement had been made in a less elitist forum.

Neil MacDonald

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