Central bank governor: Support for pound was ‘grave error’

Egypt’s focus on maintaining the pound’s value against the US dollar was a “grave error” that cost the government billions of dollars over the past five years, Central Bank of Egypt Governor Tarek Amer reportedly said in a Sunday interview with the financial Al Mal newspaper.

In the interview, Amer hinted that the bank might soon move to devalue the Egyptian pound, following a series of adjustments in March that brought the official exchange rate from LE7.73 to LE8.78 per dollar. Banks and currency exchange bureaus are directed to sell dollars for LE8.88, but that remains substantially below the black market’s rates that consistently exceed LE11 per dollar.

Egypt has received around $22.5 billion in foreign aid since the January 25 Revolution, most of which was lost in exchange rate targeting instead of being used for development or to reform fiscal policy, Amer said. “This was a lost opportunity for us.”

In order to maintain the pound’s official exchange rate, the Central Bank of Egypt auctions over $100 million a week to local banks. This year, it has also held a number of extraordinary auctions, selling more than $1 billion at a time in an attempt to eradicate the black market.

According to Amer, Egypt’s current weak domestic production is not enough to meet local demand, forcing the state to import commodities, which means that it must spend its currency reserves.

Using foreign currency reserves to boost the value of the pound and keep imports cheap has amounted to substantial state subsidies for the rich as well as the poor, “whether they deserved it or not,” Amer said. He added that it is necessary to allow the cost of imports to increase by allowing the pound’s value to fluctuate which would eliminate distortions in the exchange market.

The March adjustments to the pound were “a corrective move” intended to curb imports, Amer said. As for future devaluations, Amer indicated that he will make what he believes to be the right decisions and bear the responsibility for the consequences. The public must understand that we are facing difficult circumstances, he said. “Personally, I would not rejoice if the exchange rate stabilized and factories stalled.”

Economists and officials have long called for a more flexible exchange rate, arguing that maintaining a value that is pegged to the dollar is bleeding Egypt’s foreign currency reserves dry and harming Egypt’s competitiveness at a time when the dollar is outperforming global currencies, including the euro.

With Egypt dependent on imports for basic commodities, “luxury goods” and industrial inputs, any devaluation will cause a short-term increase in the average cost of living for Egyptians. Both core and headline inflation soared in May, prompting the Central Bank of Egypt to hike interest rates last month.

Amer also noted that policies aimed at cracking down on the black market had backfired, particularly dollar deposit limits implemented by his predecessor Hesham Ramez. Since lifting deposit limits in March, net deposits in banks have risen from $40 million to $700 million per month, Amer said.

The central bank governor also clarified reports that domestic bank customers will be banned from using their debit cards overseas. According to Amer, the controversial directive is only a guideline, and it applies only to customers who abuse their cards to obtain large amounts of foreign currency without a clear purpose. Amer gave the example of a group of currency speculators who used debit cards to obtain $3 billion in cash to sell on the black market, and another trader who was arrested at Cairo airport in possession of 70 debit cards.

Amer also confirmed that the Central Bank of Egypt repaid a $1 billion dollar central bank deposit last Friday and plans to make an $800 million repayment to the Paris Club on July 18. He did not specify to which country the deposit was returned, but previous reports indicate the sum was repaid to Qatar.

Amer also addressed the question of IPOs for public sector banks, saying that by the end of this year, “or early next year at the latest,” the government intends to float 40 percent of the Arab African International Bank and 20 to 30 percent of Banque du Caire on the Egyptian stock exchange.