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Suez Canal in pounds?

By Nesma Nowar

Would collecting the Suez Canal fees in Egyptian pounds be useful for the economy? Nesma Nowar finds out
"Why don't we levy the Suez Canal fees in Egyptian pounds?" is a question that has been posed several times after the 25 January Revolution. It has turned into a national cause, ongoing through Facebook and other social networks, demanding that the Egyptian pound should be the only currency in which the Suez Canal 's fees are collected. The campaigns have claimed thousands of supporters. In fact a lawsuit had been filed by two lawyers demanding that the Canal fees be collected in Egyptian pounds. But the administrative judiciary courth has turned down the lawsuit. The court stated that it is not Competent to rule in such case.

Activists and supporters of the cause believe that collecting the Suez Canal fees in the local currency would lead to an increased demand for the pound because all the ships passing through the canal would have to buy the pound to pay the fees. This would in turn increase the value of the pound in international currency markets.

The essence of the idea is mainly driven from the previous Kuwaiti model of using the dinar for the payment of local petroleum deals and exports, and the consequent rapid increased demand for Kuwait's local currency.

However, economists and experts are on a completely different wavelength.

Ahmed Ghoneim, professor of economics at the Faculty of Economics and Political Science of Cairo University, stated that collecting the Suez Canal fees in the Egyptian pound "does not make any sense and it would have a negative impact on the economy". He pointed out that currently the state needs dollars in order to spend on imports and to accumulate foreign reserves.

Ghoneim further said that increasing the demand on the Egyptian pound would not necessarily lead to an increase in its value because there are a lot of determinants that could affect the currency's value. He explained that there are short-term determinants like interest rates, medium-term determinants such as the inflation rate, and long-term determinants represented in the economy's growth rates.

Ghoneim believes that Egypt's economy is now weak and turning the Suez Canal 's fees into the Egyptian pound is definitely not the solution. "This idea is not applicable now or during the next 10 to 15 years," Ghoneim told Al-Ahram Weekly.

Economist Hazem El-Biblawi, expressing his opinion on the issue in an article published in Al-Shorouk newspaper, explained the rationale as to why the move would not be beneficial to the government. He said that when the ships passing through the canal pay in dollars, that money is pocketed by the Egyptian government. But if these ships were to pay in Egyptian pound, they would have to buy it from the local market.

"This situation would lead to an increased flow of dollars to local banks and foreign exchange bureaus, [not to the government]." Consequently, he said, the economy's share of foreign currencies would remain the same given that the amount of foreign currency only changed hand from the government to banks and forex companies. Thus, the exchange rate would not change as the total available foreign currency will remain the same.

El-Biblawi said he believes that the redistribution of the foreign currency's resources in the favour of the private sector could be harmful.

He explained that the state has significant needs for foreign currency to cover its import needs. When the government loses its own resources of foreign currency, it would have to buy its needs from banks and forex companies, he said.

"Therefore, the cost of the foreign currency would increase for the government, and the Egyptian citizen is the one who would bear such cost," he said.

El-Biblawi adds that paying the Suez Canal fees in Egyptian pounds would not benefit the Egyptian economy but it would rather benefit the banks and exchange companies.

The Suez Canal fees are currently collected in Special Drawing Rights (SDRs) according to one source at the Suez Canal Authority (SCA) who preferred to remain anonymous. SDRs are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). The value of SDRs is defined by four major currencies including the euro, Japanese yen, UK pound, and US dollar. "Any ship is free to pay in one of these four currencies," the source told the Weekly. "But 99 per cent of ships prefer to pay in dollars and 100 per cent of the whole naval transportation transactions are carried out in dollars."

He too pointed out that Egypt is now in a dire need for dollars because the state imports many of its needs. Collecting the Suez Canal fees in pounds would deprive Egypt of around $5 billion annually.

The source said that the SCA is the only entity which is responsible for defining the way and the currency in which the Suez Canal fees should be collected, and that it is completely independent in doing so. Earlier in March, the SCA decided to keep on the passage fees of ships as they are, without any change, throughout 2011.

Sara Ali, a supporter of collecting the Suez Canal 's fees in pounds, who spoke to the Weekly, acknowledged that this may not be the right time to implement such idea because of the downfall in the tourism sector and Egypt's need for foreign currency.

The Suez Canal is one of Egypt's most important sources for hard currency, along with tourism and remittances. The Suez Canal 's profits reached $4.8 billion in 2010 compared to $4.3 billion in 2009.

© Al Ahram Weekly 2011