Spotlight: Dollar skyrockets in Egypt amid speculations of pound floatation

The rate of the U.S. dollar in the Egyptian black market has recently risen to near 14 Egyptian pounds while the official rate stands at 8.88 pounds amid speculations of imminent floatation of the local currency to make it bend with the dollar wind.

The foreign currency reserves at the Central Bank of Egypt (CBE) declined since the 2011 uprising that toppled former president Hosni Mubarak from 36 billion U.S. dollars in early 2011 to 19.59 billion as of end of September.

As the country is currently battling the highest dollar hike in its modern history amid a sharp economic recession, economists and financial experts recommend local currency devaluation or floatation as a short-term plan to flourish economy.

Experts believe that the local currency devaluation is a temporary solution that should be followed by medium and long term economic reform plans to increase revenues, decrease expenditures and boost the sectors of dollar resources such as tourism and exportation.

FLOATATION INEVITABLE

"I believe everyone is convinced of the inevitability of local currency devaluation, whether via controlled or complete floatation. The devaluation is not a purpose itself but it aims to mark a beginning of economic reactivation," said Mohamed Farid, head of Dcode Economic and Financial Consulting Company and former finance minister's adviser.

Farid, also former EGX vice-chairman, believes that the exchange rates are "exaggerated and unjustified" as nothing has changed over the past couple of weeks to show dollar shortage and make it rise to approach 14 pounds.

He argued that the local currency devaluation should be accompanied by three other measures: greatly increasing the interest rates, pumping more foreign currency in the market and regulating the currency exchange market. "This is a package of four measures to control the issue.

"One of the direct results of the currency devaluation is that it flourishes the exportation sector, yet Egypt needs to work hard on its industrial capabilities to be an exporter," the economist told Xinhua.

Egypt's budget deficit has exceeded 35 billion dollars in the outgoing fiscal year 2015/2016, which led the country to resort to a 12 billion dollar loan from the International Monetary Fund (IMF) whose initial agreement has been reached in August.

"The IMF finance of an economic reform program to reduce the budget deficit and that of the balance of payment is good and should be positively looked at," Farid continued, noting that foreign loans are so much cheaper than local ones in terms of interest rate.

He expressed belief that Egypt will overcome these challenges as illustrated in the history of similar economic issues overcome by the most populous Arab country, stressing "it all depends on the long-term plan following the short-term plan of pound devaluation."

LONG-TERM PLAN NEEDED

Egypt's economic recession developed over the past five years of political turmoil and relevant security issues, leading to the decline of tourism, exports, foreign investments and foreign currency reserves.

Finance Minister Amr Garhy said in late July that the economic reform program aims to reduce a budget deficit varying from 11 to 13 percent of the country's gross domestic product due to higher expenditures and lower revenues.

Ahmed Shalabi, manager at a financial investment company in Cairo, echoed Farid's view that Egypt should follow its expected short term plan of local currency devaluation with medium and long term plans to reform and boost the basic economic and foreign currency resources.

"To boost economy, Egypt's best solution is to increase revenues and decrease expenditures and the state should also reduce the high cost of business establishment and land reclamation to encourage production and exportation," the expert told Xinhua.

He emphasized that an economic crisis should be faced by an economic policy, not an economic decision, explaining that if the pound devaluation is the right decision but the whole policy is inefficient, "it will be as blemished as a bodybuilder who does only hand exercises while his whole body is weak."

The skyrocketing dollar exchange rate scared off many foreign investors who do not want to exchange their dollars for Egyptian pounds at the official rate (1 dollar = 8.88 pounds) and then lose amounts of money when they exchange them back to dollars in the black market (1 dollar may reach 14 pounds).

"The pound floatation decision, if made, is in favor attracting investments and increasing the prices of shares in the stock exchange market, so it flourishes economy," Shalabi told Xinhua, noting the more the local currency is devaluated, the less risk endured by foreign investors in Egypt. Endit