Egypt Tinkers With Exchange System in Bid to Level Economy
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Version 0 of 1. CAIRO — Two years into Egypt’s economic malaise, the country’s central bank introduced a new foreign exchange system this week to curb speculation and protect its foreign exchange reserves. But critics warn that it is likely to increase the pain of austerity measures for the country’s poor while coming too late to stabilize the economy. The Egyptian pound fell to a record low near 6.4 to the U.S. dollar Wednesday, following the decision by the central bank to introduce a dollar auction system to try to prop up the Egyptian pound. Beginning Sunday, the government has been offering $75 million per day in auctions and has been limiting withdrawals to $30,000 per day for corporations. The move is designed to curb speculation which has run down Egypt’s foreign currency reserves by almost 60 percent since protests broke out in January 2011. The reserves now total about $15 billion. Analysts call the new currency regime a positive first step toward allowing the pound to float freely, but many in the banking community have criticized the timing of the new measures, saying they should have been adopted at least a year ago and that the late reaction will hit vulnerable people the hardest. “We have been waiting for this for a long time, at least two years,” said Mahmoud Abul Eyoun, the former central bank governor who oversaw Egypt’s historic flotation of its currency and the eradication of the black market in January 2003. “The bank has unfortunately lost a lot of foreign currency, and this is the price that has been paid for the late decision,” he said. The central bank’s measures, seen as a de facto devaluation, have allowed the pound to slide almost 3 percent over the last few days after limiting its decline to only 6 percent since the uprising that toppled the former president, Hosni Mubarak, almost two years ago. The renewed currency crisis also heightens the economic challenges facing President Mohamed Morsi as his administration tries to calm the panic caused by his move to push through a disputed new constitution in the face of widespread and passionate opposition. The auction system will allow the price of the pound to better reflect supply and demand, though it is uncertain whether it will stem the run on the currency. It is also unclear how much of its remaining foreign reserves the central bank is prepared to spend if market pressures continue to drive the pound down. What is clear is that the pound’s fall is certain to increase the price of key imported staples, hitting the two-fifths of Egypt’s 84 million people who live near the poverty line and depend on food and energy subsidies. “This is going to add a lot to the fiscal burden if the government continues to have subsidies,” Mr. Abul Eyoun said. Mr. Abul Eyoun predicts a 20 percent jump in the price of staple goods if the government cannot finance its deficit and if the pound continues to slide. “It is a dilemma, and I feel that this government and central bank will have to go through hard times,” he said. Egypt is the world’s biggest net importer of wheat, and a major importer of tea and sugar. The country already struggles to fund its imports, and a cheaper pound will raise the bill. Anticipating the impact of the pound’s devaluation, the government plans to increase state budget allocations for food and commodities, an official at Egypt’s investment ministry was quoted as saying in the Egypt Independent daily newspaper on Wednesday. State-run commodity companies are also taking precautionary measures to respond to the sharp weakening of the pound against the dollar. Oil and gas imports, needed to meet demand for subsidized fuel, are also likely to cost more, putting further strain on Egypt’s precarious fiscal situation. “I would have expected them to reform the energy subsidy first before a devaluation,” said Alaa Arafa, chairman of Arafa Holding, an Egyptian textiles company. “But I really do not understand this financial or economic rationale.” The government spends around a quarter of its budget on keeping fuel prices low for the public, but often these subsidies do not reach the neediest and corruption leads to higher prices on the black market. Mr. Morsi and his administration have stalled on important measures like energy subsidy reform, tax increases and a $4.8 billion loan from the International Monetary Fund, which could have given Egypt its best chance of recovery. The unemployment rate is now at its highest in years at 12.6 percent, and government reports this week indicated that the budget deficit will further widen by 20 percent to 200 billion pounds, or $31.3 billion, in the year ending in June, from a 166.7-billion-pound deficit in 2011/12. Since around the time of Mr. Mubarak’s ouster, business people and economists have been calling increasingly loudly for a managed devaluation — something the central bank and the government resisted until this week. Although Egypt officially floated the pound in 2003, the currency rate has in reality been tightly managed by the Central Bank of Egypt through capital controls and trading of foreign currencies. Mr. Morsi and his cabinet have repeatedly denied there would be any currency devalution: In August, for example Mr. Morsi defiantly rejected a devaluation as “out of the question.” This has now changed. The auction system remains, technically, a managed float rather than a devaluation. But economists say that distinction is purely semantic. Mr. Morsi tried to assure the public this week that “the market will return to stability” within days and that the pound’s fall “does not worry or scare us.” But his words have done little to calm Egyptians, who have been scrambling to swap their pounds for dollars for fear that the pound will drop further. |