Stabilising the pound

Imports, allegedly a prime cause for the decline in the pound's value over the past two years, may, ironically, help to maintain it at its new level, as Niveen Wahish finds out
Almost two weeks after the value of the Egyptian pound was set at LE4.15 against the dollar, there are still no clear signs where the market is heading. Although the Central Bank of Egypt's (CBE) move was welcomed by analysts and traders, who regarded the new rate as a reflection of the real value of the pound (the dollar was being traded on the black market at LE4.25 on the eve of the CBE's announcement) the rates announced last week by banks and forex bureaus suggest that all may still not be well. Many bureaus were selling the dollar at a little over LE4.27, the maximum rate allowed under the new official margin of three per cent above and below the central rate, while bank rates hovered around LE4.20. This contrast with the situation immediately following the devaluation when the dollar was sold for around LE4.18 at exchange bureaus.
But believers in the potential strength of the pound are not discouraged. Safaa Safwan, deputy general manager of Suez Canal Bank firmly asserts that the new central rate of LE4.15 is too much of a devaluation. She is convinced that in the long run, the market value of the pound will rally, meaning that the dollar will cost less. "It is not the forex bureau clientele that guide the market, but those who buy in millions," she said. In her opinion, LE4.15 is not a price that importers can afford for a long time since it will reflect in the price of imported goods, making them excessively expensive. She expects that as a result of the new central rate, many importers will refrain from importing, thus easing the demand for hard currency and, accordingly, help the pound to maintain its value.
Should this happen, it will make up for the fact that imports were a major cause for the drop in the value of the Egyptian pound. In 1998, excessive importation of goods from Southeast Asia, rendered cheap as a result of the region's economic crisis, created pressure on Egypt's hard currency supply.
Imports have been at the heart of Egypt's economic problems for over two decades. Since the open door policy in the mid-seventies, extravagant importation of consumer goods has had a negative impact on the trade balance. Fouad Mustafa, a chartered accountant who recently prepared a study entitled "Rationing Imports" for the Academy for Scientific Research and Technology, believes that the new exchange rate will help rein in imports which, according to Ministry of Economy figures, cost Egypt some $17 billion in 1999/2000. The imports which will be the first to go are basically consumer and luxury goods for which there is a local counterpart. "Imported goods will be at a disadvantage in terms of price when compared to local products," Mustafa said.
Hesham El-Tanbouly, who owns an export/import business admits that the new central rate is an added cost to his business which will lead him to limit his import activity. Nonetheless he fully supports the steps taken by the CBE. "It was like the government was subsidising the dollar!" he exclaimed adding that it meant that imported products were on the market at prices less than their real value in a kind of subsidsed competition with the local products. "Now that the rate has been adjusted, it will give local industries a chance to catch their breath and gain a competitive edge."
However, the question arises as to the extent to which Egypt can reduce its imports, especially in light of the fact that it is a net food importer. Mustafa estimates that a reduction of about 20 per cent of total imports, basically the figure representing consumer durable and non-durable products, is easily attainable. Besides the items which Mustafa believes can be done without, there are indispensable imports such as wheat, flour, meat, machinery, raw materials, spare parts and oil. These goods enter, in one way or another, into the production process of many local industries, meaning that the prices of local products will increase. "To cut down our imports of these goods, we must work to be more self-sufficient and establish local industries for production of inputs and spare parts," Mustafa suggested. Moreover, he said that the public's awareness of the importance of encouraging local industries should be enhanced. "Due to our international trade commitments, the days when the government could ban the entry of certain products are over," he said, adding that increasing consumer preference for local products would help to put the brakes on some imports.
Devaluation proponents maintain that a higher dollar value would make Egyptian exports cheaper, and thus more competitive on international markets.
But manufacturers who need to import their production inputs to produce and export are less than thrilled with the new exchange rate.
Marwa Farid, export manager for Nile Company for Food Industries (Enjoy) argues that those who maintain that the devaluation of the pound gives exports an advantage are "way off course." Evidencing her point, she explained that imported packaging material represents 75 per cent of the production costs for her company's end product. Furthermore, she pointed out that most Egyptian manufacturers only export a small portion of the goods they produce. Her company exports 40 per cent of its fruit juice production, which comes to around 10 per cent of the company's total sales. "We do not have industries which export 100 per cent of their output."
Nevertheless even exporters of products which do not need imported inputs are not fully satisfied. According to El-Tanbouly, who exports dried onions to the EU, the recent devaluation will not enable him to sell this produce at prices lower than his competitors, but rather that his prices will be merely comparable to those of his competition.
He points out that the value of the euro has fallen against the dollar by about 20 per cent over the past two years and the pound should have followed suit since then. During that time, he was selling at prices that were higher than his competition.
To solve this dilemma, Mustafa, who studied reducing imports, recommended that since 40 per cent of Egypt's trade is with the EU, the value of the pound should be tied to a basket of currencies, rather than the dollar alone. He also added that the ability to export does not depend solely on the currency factor, but is a combination of other elements which include, but are not limited to, quality and marketing.
Recommend this page
Related stories:
Devaluation diagnosis 16 - 22 August 2001
U-turn 16 - 22 August 2001
Informed prudence, calculated risk 16 - 22 August 2001
The importance of 'long-term' 9 - 15 August 2001
© Copyright Al-Ahram Weekly. All rights reserved
Send a letter to the Editor