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.
© Business Monthly 2004
