By Jessica Gray
The Central Bank of Egypt (CBE) is prepared to “interfere” in the case of “excessive speculation” on the Egyptian pound, according to Nidal Assar, the CBE’s sub governor of investment and foreign relations. But that does not mean the CBE has a “magic number” or target it must maintain when it comes to the pound’s value or foreign reserve levels.
On Wednesday, Assar spoke candidly about the CBE’s role post-revolution during the 2012 Euromoney Egypt Conference.
“We are comfortable with the current valuation of the pound,” he said. “Our objective is to drive an orderly foreign exchange market and we are committed to maintaining Egypt’s reputation as a credible investment opportunity where investors can flow in and out with liquidity.” At time of press, the pound was worth EGP 6.09 versus the dollar, and provisional numbers put Egypt’s foreign reserves at just over $15 billion or EGP 91.4 billion.
However, maintaining liquidity in the market and keeping the pound from collapsing has cost Egypt. When the pound began to depreciate, the CBE was forced to prop it up using reserve funds. Now, with investment still sluggish and a large budget deficit, Egypt is seeking loans from the International Monetary Fund (IMF). While experts say these kinds of loans are necessary to Egypt’s economic survival, they could also hurt businesses and investors if they come with restrictions including devaluation of the pound.
Monal Abdel-Baki, assistant professor of economics at the American University in Cairo’s business school, said the longer Egypt has to wait for these funds, the worse off Egypt will be. Also the foreign exchange dealer and money market chief dealer at Merrill Lynch, Abdel-Baki made it clear the IMF must consider the difficulties Egypt will face with a weaker pound as a net importer of food, fuels and other basic goods.
“Egypt needs foreign assistance badly, or else it is going to withdraw on its reserves [further]. The IMF, by postponing its loan to Egypt, is doing so much damage and by insisting on devaluing the currency, they are going to do so much more damage to the economy,” she observed. “The IMF should comprehend that this is going to hurt the economy, they need to learn that depreciating the pound will not work.”
She supports the CBE’s work to keep the pound stable and against depreciation. “The CBE should be commended on what they’ve done. It has supported the Egyptian pound and saved it from depreciation for such a long time, of course at the expense of the foreign reserves, but it could not predict the length of Egypt’s political turmoil.”
Getting back to black
The CBE’s Assar said the CBE cannot directly boost Egypt’s flagging economy or close the ever-widening budget deficit through its policies. What it can do is protect ordinary citizens’ buying power via strict price stability and inflation control measures as well as keeping Egypt’s banks on track and adhering to regulatory standards.
“The role of the central bank is price stability and the stability of the banking sector. We are an independent entity. If we do our job properly, we’ll be able to help [the government] reach its economic targets overall,” Assar added.
How the government will reach its lofty goal of between four per cent and 4.5 per cent burdened as it is with an EGP 170 billion budget deficit, over 13 per cent unemployment and EGP 1.39 trillion in public debt was the $1 million question for other speakers at the conference.
Dr Mohamed Omran, chairman of the Egyptian Stock Exchange, said the EGX will do its part to restore confidence and stability by refusing to close the exchange, “no matter what.”
“It will only happen again if the CBE says the banking sector is not functioning. If the banking sector is working, I am working,” he added. Together with the Egyptian Financial Supervisory Authority, he is working to make it easier for companies to list on the EGX, without undermining disclosure policies and investor protection measures, as well as trying to convince the 22 or so companies not be traded currently due to non-compliance issues to do what it takes to return to trading status.
He realises that this effort won’t happen overnight since “no company is going to list or have an initial public offering unless it sees an opportunity and that investors are confident the economy is on track.”
But the biggest issue, aside from short-term solutions such as subsidies reform and improving tax collection, continues to be Egypt’s unproductive workforce, said speakers. Egypt boasts a huge number of unemployed or informal workers that do not pay taxes or have access to credit, education or vocational training.
Yaser Gamali, chief business officer and managing director of AlexBank, likened Egypt’s labour force to a patient in a doctor’s office getting a checkup. “The doctor says to the patient, you have a good heart and you’re young, but you have hypertension, which is the political uncertainty, you’re overweight, which is the structure issues [of the government and business climate] and you have high cholesterol, which is low productivity.”
His prescription? “Lose weight, work harder and relax.”