CBE governor answers questions on exchange rate

On February 25, the American Chamber of Commerce in Egypt (AmCham Egypt) hosted a luncheon meeting with Central Bank of Egypt (CBE) governor Dr. Mahmoud Abul-Eyoun. Speaking at the Cairo Marriott Hotel's Aida Ballroom, Abul-Eyoun discussed the new exchange rate policy, the central feature of which is the flotation of the Egyptian pound on the local currency market, as announced on January 28.

The CBE governor described the new policy as one "in which we face the reality of the market." He added that the new system "functions without any hidden numbers," implying a total departure from the old, pre-float "central rate," which had been dictated to all local banking institutions.

He said there was no longer any evidence of the "unacceptable commissions charged by banks" on forex transactions due to discrepancies between "official" rates and real rates.

Giving a brief history of Egypt's forex regime since 1992, he stressed the dangers of the previous tendency to "over-value" the currency. "Now we're back on track," he said. "No one can say the pound's overvalued now." The CBE, he added, "was proud to say that we're not interfering in the banks' lives at all."

In terms of the positive and negative effects of the move, Abul-Eyoun said that the local economy would benefit more from dollar-denominated Suez Canal proceeds, oil exports and customs revenue than it had before. But the government's vast subsidy system and debt-servicing requirements, by contrast, will cost more to maintain under the new policy.

As for the anticipated inflationary impact of the free float, the governor said, "It's very tough to know what the inflation rate will be in the future." He added, however, that "the effects of inflation won't be immediately felt," and that, when they are, "they won't be heavy."

Abul-Eyoun concluded with a promise that - in the context of maintaining Egypt's reputation as a safe place for investment - "the CBE will never go back on its guarantee of immediate repatriation for foreign capital."

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