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Exchange rate nears equilibrium, Black market withers
A little more than a year and a half after former prime minister
Atef Ebeid announced the so-called “free float” of the
local currency (in actuality a micro-managed controlled flotation),
the Egyptian pound’s official and black market dollar exchange
rates appear finally to be on the cusp of convergence.
Over the course of the summer, the long invincible greenback took
an unprecedented dive against its Egyptian counterpart, with “unofficial”
dollar prices falling to as little as £E 6.30 by the end of
May – after having soared as high as £E 7.50 last year.
By July, the rate had fallen further, to a meager £E 6.20,
where, more or less, it still stands.
The official exchange rate, offered – in theory – by
banks, meanwhile, has remained relatively unchanged, hovering at
or around the £E 6.18 mark: a mere two piastres less than
average black market rates. In August, however, there were reports
that official rates had in some cases outstripped those available
on the black market, as average bank rates surged to £E 6.24,
while parallel rates stayed at £E 6.22.
The first major currency devaluation, announced in August of 2001,
bumped the official rate up to £E 4.15 to the dollar, abandoning
the longstanding peg of £E 3.50. Though generally considered
a step in the right direction by the liberalizers, the devaluation
failed to eliminate the speculative pressure brought to bear on
the pound by a virulent black market. Last year’s devaluation,
though, which slashed the rate even more radically, then allowed
it to slide gradually to its current position, appears – after
some 19 months and a whole lot of inflation – to have finally
paid dividends, in the form of a foreign exchange system based on
real monetary values and not just wishful thinking.
But why did it take so long to reach equilibrium?
According to Hazem Yaseen, professor of economics at the American
University in Cairo, impending monetary stability can be attributed
to the fact that the government’s overriding objective –
to advance national competitiveness in the global market and improve
export-based economic growth – “has undoubtedly worked.”
It just took a little while.
The facts can’t be disputed: 2003 was a year of relatively
booming exports, with major industries such as textiles and building
materials realizing greater export revenues, while petroleum and
natural gas also played a role in improving national foreign currency
earnings. And contrary to expectations, given the eruption of a
nearby war, tourism saw its best year in history.
“Though it was ill-timed, the positive results of devaluation
are evident,” said Hany Genayna, senior economist at local
brokerage EFG-Hermes, pointing to the consequent inflow of foreign
currency by way of the stock market, as investors were no longer
spooked by a notoriously unstable exchange rate. “And it will
get better as petroleum and natural gas exports increase. Then the
economy will truly stabilize.”
Some observers opine that the runaway black market rates that
came in the wake of devaluation were largely the result of manipulation
by speculators and brokers. According to Alia El Mahdy, vice dean
of graduate studies and research at Cairo University, “£E
7.50 to the dollar was always an unrealistic rate. It was unjustified,
and bound to come down.” She added that the injection of £E
500 million into the economy by the Central Bank of Egypt (CBE)
earlier this year was a smart move, constituting a final kick to
the parallel market.
Genayna agreed that CBE policy under the relatively new central
bank governor Farouk El Okda has borne fruit. “He has improved
fundamentals, and, more importantly, market sentiment,” he
said, pointing to a more robust appetite for trade and investment
over the course of this past year.
According to Enayat Al Nagar, head of Misr Exterior Bank’s
currency department, falling exchange rates are also a result of
the fact that new CBE policies are implemented before they are announced.
“Before, currency speculators used to make use of the central
bank’s announced decisions,” said Al Nagar. “Now,
everything is hidden, so they can’t anticipate the market.”
What’s more, the CBE’s decision during the last Hajj
(pilgrimage) season, at the beginning of the year, to allow anyone
bound for the pilgrimage to purchase up to 2,000 Saudi riyals each
“not only restored people’s confidence in the currency,”
said Yaseen, “but in the country’s economy and banking
system as a whole.”
Other observers, however, disagree with these explanations, pointing
out that falling rates can just as easily be attributed to the advent
of the summertime “Arab season,” which sees an annual
surge in the number of tourists from the Gulf – particularly
Saudis, who are known for bringing generous amounts of foreign currency
in train. “Egypt always sees a decline in hard currency rates
in August,” said banking expert Ibrahim Al Mazalawi. “It’s
the peak month of Arab tourism.”
One thing’s for sure – with all the extra foreign cash
in the market, legitimate exchange bureaus are doing a brisk business,
with most of the exchange bureaus contacted by Business Monthly
in early August reporting that dollar-trading activity had jumped
by as much as 30 percent. “The increased availability of dollars
in the local market has boosted transactions at exchange companies,”
said Mohamed Hassan El Abyad, head of the Foreign Exchange Bureaus
Committee at the Cairo Chamber of Commerce. “The small gap
between official and black market rates emboldened those hoarding
dollars to sell.”
Ibrahim Abdel Hamid, owner of the Arab Company for Exchange, said
he had begun to see the return of old customers, who could no longer
find better “buy” rates in the black market. “Transactions
have increased drastically compared to last year,” he said.
Black marketeers, meanwhile, are having a hard time of it. One
illicit trader, known only as “Birdie,” admitted that
his business had “ground to a halt” two months ago. Others,
meanwhile, have tried to stay competitive by offering extra piastres
for dollars – but few are buying. “I pick up a dollar
for about £E 6.21, then sell it to another trader for £E
6.25,” said prospector Khaled, explaining that exchange bureaus
buy dollars for only £E 6.18. “But a few piastres more
[than the official rate] doesn’t tempt people to sell, and
we can’t offer more than that.”
While this is all well and good for the nation’s macro-outlook,
though, dollars – despite their reported profusion – still
aren’t freely available for sale at banks. According to Genayna,
banks will provide forex to certain industries, according to “priority
lists,” with companies that generally rely on locally produced
inputs facing a tougher time getting a hold of coveted foreign bills.
As for individual banking, limited amounts are still usually provided
only to those that can prove – with a passport, visa and ticket
in hand – an intention to travel abroad.
Still, even though foreign currency has yet to become freely accessible
– to anyone that requests it – at banks, Yaseen is sanguine,
saying the economy, thanks to exchange-rate stability, can look
forward to a period of downright “prosperity.”
According to entrepreneur and exchange rate specialist Alaa Abu
Alam, “We’re experiencing a quelling of anxiety over the
state of the currency, which should last at least a couple of years.”
He expects this lull to take the wind out of the sails of inflation,
and bring to an end the frantic hoarding of foreign currency by
middle-class families. “The average citizen, however,”
he added, “has to actually see a positive change before he
believes it.”
Not everyone’s sold on the happy ending, though. One currency
speculator told Business Monthly that he and his partner were busy
buying up as many dollar as they could, in advance of future shortages.
“After the summer season, the demand for dollars will rise
again. Consequently, prices will go up, and we can make up our losses,”
he said confidently.
Waleed Marzouk
With additional reporting by Summer Said
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