1:52 PM
Sunday 18 December 2022
I wrote – Manal Al-Masry:
The bankers, with whom Masrawy spoke, linked Egypt’s ability, represented by the Central Bank of Egypt, to follow a flexible exchange rate system for the pound against foreign currencies, with the presence of strong flows of dollars to control the market, and adjusting the requirements of the International Monetary Fund in accordance with the situation in Egypt, after allocating a low first payment for its disbursement to Egypt from the total loan.
At its Saturday morning meeting, the International Monetary Fund approved a 46-month cooperation program with Egypt that includes a $3 billion loan, with an immediate payment of $347 million of the total loan to help meet balance of payments and budget support needs.
The bankers believe the value of the first payment is very small, as it fell short of the expectations of Finance Minister Mohamed Maait, who had previously suggested it would be $750 million.
Among the most important drivers included in the policy package referred to by the Fund in its statement, which is expected to be implemented by the Egyptian authorities during the program period, is the permanent move to a system of floating exchange rates to improve resilience in the face of external shocks and rebuilding external buffers, criticizing the deviation of monetary policy at an earlier point in time from this path.
Kristalina Georgieva, managing director and chair of the executive board of the International Monetary Fund, said she welcomes the recent commitment by the Egyptian authorities to a permanent move to a regime of floating exchange rates, to address the distortions stemming from previous policies through earlier monetary policy tightening and to move forward towards strengthening the financial safety net, according to the fund’s statement.
Sahar El-Damaty, a former vice chairman of Banque Misr, told Masrawy that the central bank can follow a flexible exchange rate for the pound against other foreign currencies, provided there are agreements with friendly countries such as the Gulf states and institutions international to obtain dollar flows that help him control the market.
He added that exchange rate liberalization requires the availability of dollar resources to avoid a sudden rise of the dollar against the pound, which leads to a rise in prices and an increase in the inflation rate.
In its statement, the International Monetary Fund anticipated that the Extended Fund Facility arrangement, i.e. (the loan) it had accepted, would encourage Egypt to make additional financing available to Egypt during the course of the programme, in the amount of about $14 billion, from its international and regional partners, according to a fund statement early Saturday morning.
Ahmed Kajouk, deputy finance minister, had earlier said that Egypt will receive 1.6 billion dollars from 3 international institutions by the end of next June to close the budget deficit, with 1 billion dollars from the World Bank, 400 million dollars from the Asian Infrastructure Bank and more than $200 million from the African Development Bank.
Ayman Yassin, a banking expert, told Masrawy that liberalizing the exchange rate or floating the pound is not the solution to get out of the current crisis to avoid returning to the same crisis, the fall in the price of the pound and the existence of two exchange rates.
He added that the first installment of the IMF loan is very low, “rather it may aggravate the currency crisis, the lack of control of the foreign exchange market, and it does not fit the needs of the Egyptian market, and this may lead to entering a spiral of fluctuations in the exchange rate more than once.”
Ayman Yassin stressed the need for a clear strategy for Egypt to increase foreign exchange resource flows from direct investment, exports and tourism and to increase remittances from Egyptians working abroad.
A member of the board of directors of a private bank told Masrawy that if the central bank aims to curb inflation and control the pace of price increases, it is not in the interest to follow a system of floating exchange rates for the sterling at this stage, which leads to an increase in black market speculation, especially since the first installment of a loan from the International Monetary Fund is a minuscule amount that will do nothing.
He added that the Central Bank currently plays an important role in quickly intervening and using the foreign exchange reserves that are called upon in times of economic crisis with the aim of immediately financing documentary credits for basic necessities to move the wheel of the production.
And a member of the board of directors of one bank believes that “there is no need to rush to raise interest or lower the pound. We can ask the International Monetary Fund to calm down a bit, knowing full well that the central bank must be in control of the money market and not vice versa”.
And he continued: “For historical testimony and evidence, the complete liberalization of the exchange rate often fails in times of crisis to achieve the stability of the money market, especially as the Egyptian economy suffers from a serious shortage in the supply of currency due to prevailing global conditions.”
He explained that full liberalization requires huge financial capacity for the monetary authority, which is now not available, and therefore full money market liberalization could have more bitter than sweet repercussions, “so let’s leave everything as it is” .
The source added that on the ground, raising the interest rate and liberalizing the exchange rate will not help in the short to medium term to deal with the current situation, and for these tools to be successful at the local level, the external factors that adversely affect, first of all which is the Russian-Ukrainian war, it must end.
And he continued: “I hope that the Central Bank will maintain interest rates until the end of the year and begin to facilitate and reasonably finance strategic documentary credit activities from traditional state sources through the partial and transitory use of cash reserves with the imposition of a currency management fee of no less than 5% and we will be patient until the end of the year”.
He stressed that “the central bank is wise and sensible not to pursue parallel market forerunners,” expecting the central bank to announce a new interim target for inflation rates at its next meeting.
