Monday, March 14, 2016

The battle between the Central Bank and the dollar continues

Contrary to what some claimed would happen, the value of the dollar has not dropped. It has continued to climb, as reported on various news websites with sensational headlines such as “Another leap for the dollar” or “The pound continues to bleed.”
These headlines are frightening for readers and deepen the urge to speculate on the black market. At the same time, the Central Bank of Egypt (CBE) continues to reiterate that it has the ability to provide needed dollars to import basic commodities, and that shortages in foreign currencies only impact luxury items, which some describe as “provocative goods.”
But in reality, there are shortages in many basic goods, including medicine, which is why the CBE recently directed funds to import the same. While the CBE declared there is no plan in the near future to slash the value of the pound, there is news that the average dollar exchange rate in the budget of the next fiscal year starting in July is EGP 8.25.
Combining the climb in the black market and expectations that the value of the pound will drop in the next fiscal year, it is only natural to expect the value of the Egyptian pound to fall. The gap between the official rate and the black market rate is more than 15 per cent, which is huge, and the CBE must contain this gap.
However, analysts believe matters will get out of control and the CBE will succumb to pressure and float the pound. This would mean leaving the market to decide the exchange rate, resulting in big leaps in the exchange rate of the dollar at the beginning of any such process.
Some analysts believe that pressure on the Egyptian pound is much greater than the capabilities of the CBE, but monitors of CBE policies and moves understand that it still has many options. Among the many tools the CBE retains to defend the Egyptian pound and prevent its collapse on the market, six key tools can be highlighted, varying in importance, impact and reliability.
First, borrowing from international financial institutions to provide hard currency and earning certificates of confidence, most notably from the World Bank, which recently agreed to fund Egypt with $3 billion, and the African Development Bank and European development banks that funded various developmental projects.
Borrowing from international institutions will not provide large sums of hard currency because these institutions have conditions that may be difficult to meet or that exclude certain governments projects. For example, the World Bank refused to fund the reclamation of 1.5 million feddans. What is certain is that these loans grant the economy a certificate of confidence that helps attract direct investment or the purchase of investment certificates and dollar bonds.
Second, resorting to Gulf funding, which decreased last year after generous support since mid-2013 because of a drop in the price of oil and budget deficits in Gulf countries. Nonetheless, even after it decreased, Gulf assistance is a vital tool in the hands of the state, especially in times of crisis. Receiving a small portion now of what Egypt had received in the past could assist the CBE in saving the pound if black markets become overactive. However, Gulf assistance is also conditional and these requisites may be of a military nature.
Third, raising the interest rate, either by the CBE for loans to banks or the interest rate of pound-denominated certificates in state-owned banks, to attract depositors to convert their savings from dollars to pounds, and buy high interest certificates in pounds. The CBE took this step in the past and is expected to do so several more times to increase the difference between interest on the pound and dollar returns, and hence ease the pressure on the pound. However, this measure may not have much of a general impact and requires creating new and innovative investment vehicles.
Fourth, undermining foreign exchange companies by shutting some down and rescinding their licenses. This excessive measure would scare the parallel market from over-speculating on the dollar, although it always results in the opposite because it sends a message that the CBE is unable to keep up with the black market and thus needed to shut down exchange companies. This would increase dollar speculation instead of containing the parallel market. It would be wise if the CBE reconsiders such an approach.
Fifth, establishing obstacles to imports through new measures regulating imports, including increasing tariffs by the Ministry of Trade and Industry, or providing hard currency that is controlled by the CBE, thus controlling import operations and cutting down on imports it does not see as necessary. This negatively impacts the availability of many imported goods on the market, and not just luxury goods. Nonetheless, this is the fastest tool to reduce the import bill, which is a major cause for hard currency leaving the economy.
Sixth, issuing dollar investment certificates for Egyptians living overseas to increase the economy’s dollar revenues in return for attractive interest rates on these certificates. The state had resorted to such certificates in 2012, and succeeded in selling them. The state intends on issuing similar certificates once again, to collect a new reserve of dollars.
Despite increasing pressure on the pound and a spiraling parallel market, the CBE still has many tools to prevent the collapse of the Egyptian pound and this has become evident in the last few days.
All these tools can defend the pound and prevent its devaluation for some time, but not for long. These tools will be beneficial and extraordinary measures to buy some time until political and security stability is re-established, which is the real obstacle facing economic recovery.

Omar El-Shenety
14 March 2016 
This article was published in "Al Ahram Online"

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