The long-awaited decision to float the Egyptian pound has been in the making for decades, and despite its pros and cons, it was the only logical decision for the Central Bank of Egypt (CBE) and the government to take in order to end the state of suffocation dogging the market in recent years, according to officials in exchange market and treasury sectors at banks.
According to Tamer Youssef, head of the treasury sector at a foreign bank operating in the domestic market, the pound flotation decision has been awaited for decades. The decision pushes the door of the Egyptian market wide open for investments and attracts hot money to invest in securities and domestic debt tools, as well as direct foreign investment in the industrial, service, and various real estate sectors.
Youssef said this decision will lead to a stable exchange rate and eliminate the unofficial market—which is unorganised and obscure—to open the door for banks to regain the upper hand in the exchange market, as in the international markets. Exchange companies will resume their main role which is providing services for individuals and tourists only.
“I have to stress that the monetary policy which is under the responsibility of the CBE would not be the only responsible factor for the success of the flotation process. Procedures and government regulations are complementary to this decision, in order to increase the foreign currency supply by attracting and facilitating the entry of foreign investment. This is in addition to increasing the state’s resources from export-oriented sectors, tourism, and reducing imports,” Youssef said.
Regarding the 3% increase in the basic interest rate at the CBE, Youssef noted that the decision was expected to create demand for the pound and decrease demands for the dollar at the beginning of the pound flotation.
Other banks will similarly raise their interest rates.
This increase in the interest rate is also important as it should contain the inflation expected after the flotation decision and the accompanying governmental measures. The increase will also attract foreign investors to invest in treasury bonds and bills, for which interest rates were increased after the CBE’s move, according to Youssef.
Youssef believes that any negative impact from the increased interest rates is represented in the increased burdens of domestic debt service, but this will not last for more than six months. After the stability of the foreign exchange market and the influx of foreign investment, interest rates in the market will go back down again.
The state can offset the general budget deficit, which is expected to increase by allocating part of the private funds for the benefit of the general budget, as well as increasing the income tax and the tax exemption limit to EGP 36,000 per year to protect low-income citizens, according to Youssef.
Youssef said income segments that taxes are applied on must be expanded, in order to include new segments of more than EGP 500,000 a year, and a maximum tax rate of 40% on the top segment.
Increasing the tax exemption limit on low-income citizens will not affect the state’s resources because the recently activated value-added tax (VAT) will compensate for this.
He explained that citizens who will receive tax exemption will obtain more liquidity; therefore, they will tend to buy items and pay VAT on them or save it in banks, thus providing liquidity to banks to relend them to others—which leads to an economic motion that benefits everyone.
According to Osama El-Menilawy, the assistant general manager of the financial sector at a private bank operating in Egypt, the pound’s flotation was a must for the government and the CBE in order to end the years-long state of suffocation in the market. He said this decision will disclose the real price of the local currency away from the effects of the government or speculators.
El-Menilawy said that it is not easy to judge this decision at the current time, but it certainly has its pros and cons.
The elimination of the unofficial market and a unified dollar exchange rate will attract more foreign investments to Egypt, and eliminate speculation and fraud when obtaining dollars from banks then selling them in the unofficial market—similar to what was happening with electronic payment cards. This is the most prominent advantage of the pound flotation decision, according to El-Menilawy.
He added that the leading disadvantage is that the price of goods will increase, if the government does not control them—especially because the price of goods and services are not controlled.
He pointed out that those who bought the dollar at high prices will work hard to raise the price of the dollar again, so as to not bear significant losses, which requires the CBE and banks to be focused.