By Mohamed Ayad
The deputy governor of the Central Bank of Egypt (CBE) has admitted that the bank has failed to bring balance to the exchange sector over the last two years, causing the strength of Egypt’s currency to become dependent on the nation’s reserves, which since the revolution have lost more than half their value.
Deputy Governor Rania Al-Mushaat added that the CBE had been late to adopt a policy regarding the nation’s exchange sector that reflected the need to preserve the value of local currency, as an economic indicator representing the overall strength of Egypt’s economy. She described the Egyptian pound as the “only thing that could demonstrate the strength and stability of Egypt’s economy to the international community,” considering the failure of nearly all other indicators to do so.
She further stated that the events of the January 25th Revolution and the rapid political and economic changes that followed it placed a huge burden on the CBE, preventing it from intervening to bring balance to the exchange market, forcing the Egyptian pound to lose value.
The deputy governor admitted that the CBE’s policy of working to maintain the strength of the pound is what led to the rapid decrease in Egypt’s foreign currency reserves. This was, she said, a dangerous indicator of the country’s ability to pay its foreign debts and guarantee a steady flow of goods to Egyptian suppliers.
She stated that the CBE’s new policy unveiled last week would be to increase the number of dollars in circulation to meet increasing demand and bring balance to the exchange market. She added that the bank would not attempt to manipulate the value of Egypt’s currency in the future.
She added that the effects of any new policy were bound to be negative once first implemented, as witnessed during the first three days of last week, when the CBE was unable to meet the entirety of the market’s demand for dollars, which she described as “not real and exaggerated”. However she pointed out that the market had stabilised in the days following, which demonstrated the general state of confidence felt by the nation’s businessmen.
Mushaat added that the CBE had begun to intervene in Egypt’s exchange market when the rate of inflation fell from 10 to 4%, along with expectations that the price of food would not increase. In addition, the CBE had agreed with the government to establish a minimum level of credibility regarding Egypt’s economic policies, in order to educate investors about future rates of exchange, taxes and interest rates.
She added that the government’s delay in accepting the IMF loan, the recent downgrade in Egypt’s credit rating, and rumours that the country was going bankrupt, had coalesced to cause the CBE to intervene in the country’s exchange market in order to end speculation.
Egypt’s foreign currency reserves are less than $5bn, $4 bn of which are in gold. Critics have argued that this is only enough to pay Egypt’s foreign debts, which total $13 billion for the first quarter of this fiscal year, for three months. However Mushaat said these claims were purely theoretical and were the result of “irresponsible chatter” by businessmen and state officials. If this were true, she said, this would lead to the total drying up of Egypt’s foreign currency reserves and freezing of state revenues, something which has not yet happened.
