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Executive Insights
Policy, business leaders mull fiscal
issues
A full year following the announcement
that Egypt would adopt a floating currency, many problems continue
to dog the market: the gap between the official and parallel market
dollar rates remains vast, monetary policy opaque and foreign currency
is still as inaccessible as it was before the “flotation.”
Current efforts aimed at getting monetary policy back on track,
and important recent transitions in financial reform, were the topics
of a dynamic discussion between businesspeople and policymakers
at Business Monthly’s first Executive Insights roundtable discussion,
held in the boardroom of Grand Hyatt Cairo on February 12.
Participants included:
Mahmoud Mohieldin, head of the Economic Committee, National Democratic
Party; member of the board, Central Bank of Egypt
Hassan Abdalla, vice chairman and managing director, Arab African
International Bank
Ahmed M. El Khadem, director general, Egyptian Tourism Federation
Hussein Choucri, chairman, HC Securities & Investment
Salwa Mansour, senior manager, Export Development Bank
The interbank market
According to panelists, ushering
in a real flotation depends heavily on enhancing the liquidity of
foreign exchange in the banking sector. Setting up an interbank
system for foreign currencies has been cited by economists for months
as a prerequisite for narrowing the gap between the official rate
for the pound (vis-à-vis the US dollar) and the black market
rate, which have hovered at around £E 6.15 and £E 6.90,
respectively, since last summer.
Prime Minister Atef Ebeid had said in January, at the second annual
Economist roundtable, that such a system would be set up in February.
As of February 12, though, observers were still waiting.
“The prime minister was talking about something that should
have been in place before the announcement of the free float a year
ago,” said Mohieldin. A year later, the “main pillars”
of the interbank system – including the legal framework and
infrastructure – do exist, he added.
But the challenge, according to Mohieldin, is getting the system
up and running. “For this framework to be activated and used
effectively, there are some conditions that should be met in terms
of the right environment of monetary policy,” he commented,
citing interest rate adjustments and the willingness of the government
and central bank not to intervene in the workings of the market.
“I think now, under the new leadership of the central bank,
things are being put in order,” he said.
While having the necessary infrastructure in place is “very
encouraging,” to analysts like Choucri, a daunting challenge
will be funneling the dollars currently floating through the black
market into the formal market. “We need to get those dollars
through the banks into the banking system to get this market started.
I think that’s the challenge,” remarked Choucri.
The dollar shortage
The availability of dollars continues
to be a grave problem for businesses big and small. To compensate
for the shortfall, many companies are turning to the black market
– where exchange rates have risen above £E 7 since the
summer.
The tourism industry – one of the country’s most lucrative
hard currency earners – has been hit particularly hard by the
currency crisis. “That kind of transaction happens everyday,”
said El Khadem, director general for the Egyptian Tourism Federation.
Foreign airlines, he explained, often turn to the black market,
since they must transfer millions of dollars abroad but receive
most of their revenues in pounds. “[Airlines] go to the parallel
market. Every day they keep these funds in pounds, they lose,”
he said.
El Khadem noted that, in the early 1980s, a “legitimate walkway,”
created by the government and banks, offered a premium – over
the official exchange rate – to people who sold dollars
to banks. “I don’t see why they can’t revisit that
type of system,” El Khadem said.
Abdalla, however, strictly opposes such intervention. Any effort
to intercede in the market would ultimately backfire, he said, since
the whole point of implementing a free float is – eventually
– to have a single exchange rate. “Distortions will blow
up in your face sooner or later,” he said.
Presumably, once a functional interbank market is in place and banks
have plenty of foreign currency liquidity floating between them,
companies will move from the black to the white market, boosting
demand in the latter.
For now, though, Egyptian depositors are loath to give up their
dollars, even though the greenback is suffering huge losses internationally.
This has prompted some analysts to suggest the pound is undervalued
– perpetually kept down by speculators.
Abdalla noted that companies – anticipating dollar rates to
soar in the months to come – have been buying what they need
for the coming six to nine months.
Meeting demand
Hiking interest rates on Egyptian
pound deposits has been cited by economists as a means to entice
people to hold their savings in local, as opposed to foreign, currency.
But bumping rates to artificially high levels beyond 20 percent
– which might be necessary to effect a change – “would
complicate the operations of the market,” Mohieldin noted.
In lieu of hiking interest rates, panelists underlined the importance
of meeting foreign currency demand by utilizing the country’s
international reserves – the most important ingredient of monetary
freedom. “Banks need some money to play with in the beginning,”
observed Choucri. “The most important ingredient is the availability
of currency, which allows a bank with an oversupply of currency
to lend to another institution that needs it.”
Mohieldin described attempts to fix the currency in the past as
“failures” that depleted international reserves and shook
faith in the entire monetary system. “[The NDP] is not supporting
the government if there is any kind of a drift or a shift or a change
or possible hint of a u-turn on a free float supported by good discipline
and tight monetary policy.” Using international reserves must
be done “rationally and wisely to support the free float,”
he added.
The next step is for the central bank and government to decide on
a starting date for the interbank system, at which point the “market
will be tested heavily because everyone will be buying dollars.”
To succeed, the CBE should be prepared to dip generously into reserves,
Choucri emphasized. “The key to all this is enough liquidity
at the starting point, and if the central bank errs, it should be
on the higher side. “Provide enough – more than enough.
And if it’s more than what the market needs, this will be reflected
in the price,” he said.
Decree 506
Probably the most provocative intervention
in the market since January 2003’s controlled flotation has
been prime ministerial decree 506, introduced in March 2003, which
calls on all businesses to convert 75 percent of their foreign currency
income into Egyptian pounds at official bank rates. The decree aims
at making hard currency available to importers in an effort to lure
them away from the black market.
Originally, 506 was designed as a temporary, six-month decree that
would be removed once supply and demand of foreign exchange stabilized.
One year after the decree was issued, though, this still hasn’t
happened.
Tourist establishments have arguably been the hardest hit by the
decree. El Khadem noted that there has been a “confused implementation
situation” in the forex-heavy tourism industry.
Since, in practice, travel agencies are also required by banks to
convert their earnings, agencies have not been able to retain enough
foreign currency in their accounts to pay for hotel bookings, while
hotels – in compliance with Decree 79 – must receive payment
only in foreign exchange. “This is a very, very awkward situation,”
El Khadem said.
Some local tour operators are asking their counterparts abroad to
pay for hotel bookings, which is “unhealthy,” El Khadem
said. “You have a whole service sector in Egypt being robbed
of a turnover value of about $600 million a year.”
Another problem currently facing the tourism sector is that most
tourist companies have recently been refusing to accept credit cards,
leading to a drop in credit card transactions in the sector by 30
percent since January. When the funds come from abroad in foreign
currency, the bank picks up a commission, and the travel agency
is paid in pounds – but is then expected to pay in dollars,
creating yet another “awkward situation.”
Abdalla and Mansour agreed that, when companies convert their hard
currency earnings, banks also have a responsibility to provide these
companies with enough foreign currency to finance their operations.
Banking reform
Confidence in the banking sector
has also been shaken in recent years due to the ongoing bad debt
crisis. Mohieldin estimated that non-performing loans (NPLs) still
account for 14 to 16 percent of the sector’s loan portfolio.
Choucri, though, said the magnitude of the NPL problem is “still
a secret,” and is probably higher than official estimates.
Improving the image of banks – the “locomotive of the
economy,” according to Choucri – is essential if the economy
is to achieve growth rate targets of 4 to 5 percent annually.
The passage of a new banking law in July 2003 could help restore
the industry’s credibility, since its articles enhance the
CBE’s supervisory authority over the sector and outline a set
of precise lending rules.
Still, Mohieldin said many of the current 55 banks “are not
really eligible to be called banks.” By forcing loss-making
banks to merge with better-capitalized ones, the law will eventually
create a more efficient banking system of about 35 leaner institutions.
Privatization of the “big four” public sector banks is
also on the agenda of the new CBE board. “We may be seeing
at least one bank being put up for privatization within 18 to 24
months,” Mohieldin said.
In terms of setting monetary policy, the law calls for a seven-member
coordination council to be formed, including the CBE governor, three
ministers and three independent experts. When the council is set
up, presumably in the near future, its only responsibility, Mohieldin
insisted, will be to set inflation targets.
The CBE board, meanwhile, will be the “ultimate authority”
in terms of carrying out measures to achieve these targets, independently
of the state. “Any talk about... how the monetary policy should
be set... is something that shouldn’t be discussed by the government
at all,” said Mohieldin.
Putting tools to the test
With the monetary system undergoing
vast changes, panelists concluded by highlighting the importance
of dialogue in enhancing transparency and boosting confidence in
financial reform.
Choucri noted that CBE policy changes are currently occurring in
a vacuum, leaving market participants out of the loop.
El Khadem, for one, believes the tourism industry – as important
as it is to the country’s national purse – should have
a “stronger say in fiscal policy.”
While Mohieldin wasn’t keen on establishing permanent advisory
boards, he said that new central bank governor Farouk El Okdah is
anxious to have “continuous dialogue and discussions”
with representatives from different sectors – a step that could
help put the tools of monetary policy to the test.
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