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Egypt struggles to overcome pound devaluation

The pound is currently trading at 6.15 to the dollar in banks and at 6.50 on the black market. On January 28, the last day it was pegged to the dollar, it was worth 4.51 in the banks and 5.30 on the black market.

Experts close to the government say inflation has been about four per cent since January, but sources close to workers unions put it nearer 30 per cent. Prime Minister Atef Ebeid acknowledged in recent comments to the press that the country was suffering from higher living costs, without giving figures.

Ebeid said the pound's lower exchange rate made imports more expensive and hiked production costs, and accused "greedy" traders and manufacturers of not being willing to share the burden with the rest of the population. "The manufacturer should lower his profit (margin) instead of transferring the increase in production costs to the consumer," he told the Al-Gomhouriya daily. He also said the "normal" exchange rate should not exceed 5.60 pounds to the dollar. While insisting that the government had no intention of intervening on the currency market, he urged the banks "to agree" on this rate. But it will be difficult for banks to check the deterioration in the pound's value in the absence of an adequate offer of hard currency on the market, analysts say.

"It would be illusion to think that this measure (the flotation of the pound) on its own would be the answer to everything," said Ahmed Galal, director of the Egyptian Center for Economic Studies. "The flotation should have come as part of a set of measures that includes high interest rates in the short run," to keep the pound attractive, "and an increase in the supply of hard currency to the market, whether from borrowing or from the state's reserves," he said.

The continued hard currency squeeze, reflected in the banks' inability to fulfill demand from individuals, has allowed the black market to survive.

Banks allocate their hard currencies to finance imports and trade. An individual cannot buy hard currency from banks unless he produces a travel ticket and even then, no more than the equivalent of 500 dollars.

The government initially expected the flotation of the pound to stimulate investments and exports, and consequently fulfill public demand on hard currency without having to intervene by selling from its reserves.

Latest official figures, from February to April, show Egypt's non-oil exports treading a line close to 300 million dollars a month, at the same level as the corresponding period last year. Economist Hanaa Kheir El-Din said textiles, one of the country's main exports, continue to suffer from weak quality control and marketing abroad.

"The problem is that Egyptian consumers are usually not demanding, and therefore provide little motivation for manufacturers to improve quality control," she said.

In 2001-2002, Egypt's imports stood at 14.64 billion dollars and exports at 6.64 billion dollars. Figures for 2002-2003 have not been released.

The country's main currency earners are exports, tourism, transit fees from the Suez Canal and money transfers from Egyptian expatriates.

According to official figures, oil accounts for around 40 per cent of Egypt's exports. Finished and semi-finished goods make up 39 per cent, raw material and cotton 16 per cent and re-exports from free zones five per cent. Officials say tourism, which generates some four billion dollars a year, is faring well this season, and much better than expected in light of the regional political tensions associated with the war in Iraq. In June, tourist arrivals rose to 380,500, slightly higher than the June 2002 figure of 362,000. Newspapers have reported a record figure of 623,000 tourist arrivals in July.