For the first time in years, the value of the pound versus the dollar is going up instead of down. Niveen Wahish reports It has been two years since the oft-discussed floatation of the pound, and the subsequently sharp and continuing drop in the Egyptian currency's value. Only recently have things begun to look slightly greener for the pound. First, the gap between the official and parallel black markets began to disappear. Then, an amazing reversal occurred: the price of the pound vis-à- vis the dollar actually began to drop, going as low as LE5.95 earlier this week. As usual, these sorts of fluctuations set the market in a whirl, with mixed reactions to the improvement in the pound's value. Those who had been hoarding dollars, hoping to sell them as their value rose, rushed to dump their dollars and cut their losses. Although most people seemed relieved that the pound was finally holding its ground against the dollar (thus ameliorating an odd situation where globally, the dollar had been dropping while in Egypt it kept rising), others were cautious in their optimism. Mohamed El-Abyad, head of the Foreign Exchange Bureaus Division at the Federation of Chambers of Commerce, said the most recent developments were unhealthy because they were happening too fast, and taking place in a market that wasn't necessarily functioning properly. Healthy or not, it happened, and there are several reasons why. In fact, it was that combination of factors that enabled the pound to regain its strength. For one thing, El-Abyad said, the value of the dollar has been dropping worldwide, and "it's about time that it dropped here as well." The fact that there is usually not that much demand for the dollar during the holiday season, he said, was also a factor. Economist Hanaa Kheireddin cited the market's overall recession for the dearth in dollar demand. With the rise in the value of hard currencies over the past couple of years, she said, everything has become very expensive. The result: there was not much demand to import either consumer or investment goods. In the meantime, the Central Bank of Egypt has taken a number of steps that have improved the dollar's availability, first and foremost by encouraging banks to raise their interest rates on pound deposits to 12 per cent. That has resulted in Egyptians exchanging their dollar savings for pound savings in order to capitalise on the higher interest rate. The activation of the dollar inter-bank system, which allows banks to better manage their hard currency liquidity by enabling them to borrow and lend on a real time basis, has also helped overstep speculators. "This shows that when the dollar once went up as high as LE7, that was an exaggerated rate," Kheireddin said. "It was all due to speculation and expectation." Safaa Safwan, head of international transactions at Suez Canal Bank, agreed that -- with supply abundant and demand low because of the recession -- "all of the conditions were now suitable for the improved rate." Safwan does not expect demand to pick up any time soon -- even with the pound's improved value. "What happened to the Tsunami-hit Southeast Asian countries means that imports from those countries will slow down considerably in the coming period," she said. Another factor: ahead of this year's hajj season, most financial institutions -- led by the four public sector banks -- made it clear that each and every pilgrim would be able to exchange their pounds for 2,000 Saudi Arabian riyals, a move that has averted the usual rush to acquire hard currency for the trip. According to Safwan, the fact that the pound's value has begun to improve revealed the "poor timing of the float decision, since the market was not ready for it." She said the decision took the market by surprise, and that complementary mechanisms such as the inter- bank system were not in place. The fact that it took place just before the war on Iraq also took its toll. "Now that the environment is suitable, the system is functioning, and the pound's value is stabilising," Safwan said. That stability is one of the government's primary targets. Sherif Delawar, a management professor at the Arab Academy of Administrative Sciences and member of the ruling National Democratic Party's (NDP) Policies Committee, harked back to a 2003 NDP economic paper that urged Egyptian monetary policy to target inflation. Based on that recommendation, he said, the government has been trying to protect the pound's value in order to maintain price levels for low-income groups. Policies like increasing interest rates on pound deposits, he said, have been targeted towards that goal. Delawar also pointed out that a general improvement in hard currency receipts has also helped the situation. For the first time in six years, he said, the Central Bank of Egypt (CBE) announced that foreign reserves had increased -- to LE15 billion, after having dropped to LE12 billion from LE21 billion high in the early 1990s. Drained by government attempts to meet the market's dollar demand, reserves have been dropping since the late 1990s. Today's improved foreign reserves situation has a lot to do with the increase in hard currency revenues from tourism, gas exports and the Suez Canal. In fact, this year the Suez Canal made its highest ever earnings in 135 years -- hitting $3.087 billion. Tourism receipts reached $5 billion for fiscal year 2003/ 04, compared to $3.7 billion the year before, and the sector's revenues are expected to hold steady, if not improve. "Some of the tourists who traditionally headed to tsunami earthquake stricken areas, may head our way," Delawar said. Improved confidence in the economy and the government's new economic team is another factor that may have supported, and will continue to support, the value of the pound. Delawar said confidence could make or break an economy. "The past few months may not have seen actual results, but an environment of trust in the new cabinet has been created," he said. One of the factors that have earned the new cabinet that kind of confidence was the recent cancellation of decree 506, which forced exporters to surrender 75 per cent of their hard currency revenues. "It is the interaction between these different factors that has led to a synergetic effect," Delawar said. However, he stressed that the sustainability of the current phenomena remained up in the air. "It could only be considered a trend if banks are able to promptly meet demand to open letters of credit to enable importers to meet their commitments, rather than force them to collect their hard currency needs from the market," he said. Indeed, the pound's ability to sustain its current value, if not improve it, will also very much depend on what the government does. As Hanaa Kheireddin put it, "everyone is waiting to see what the government will do. People are hopeful, but not that sure that promises will be met."
