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Egypt's economy hit by global currency war

Contrary to recent global currency trends, Egypt should strengthen its pound to help curb inflation and address structural deficits of trade and budget

Amr El Feki, Salma Hussein, Monday 10 Jan 2011
“We will double our exports over the next five years”, says Obama
“We will double our exports over the next five years”, says Obama. (Photo: Reuters)
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"The Egyptian pound is depreciating big time," says executive director of the Egyptian Center for Economic Studies (ECES), Magda Qandil.

She adds that further depreciation would harm our exports to the EU and increase inflation due to the resulting higher import bill.

"Depreciation (of the pound) alone does not increase exports," argues Qandil in a workshop on impact of the currency war on Egypt, held on Monday at the ECES.

The term currency war is being used to describe the efforts of big players in global trade to boost exports by depreciating their local currency to make its products cheaper.

Egypt, despite being a small economic player, has found itself caught up in this war.

The US, for instance, is suffering from low domestic demand by consumers and so finds itself needing to boost exports. This leads to a need to lower the value of the dollar.

Emerging exporting countries as a consequence find that their currencies are now appreciating against a weak dollar.

Besides having a weak currency, the US interest rate is almost zero, which makes investors look for other countries around the globe. Egypt became one of the favorites.

For its part, Egypt offers high interest rates for many reasons, and this makes it a hub for hot money, investors come in, buy 3-months T-bills, and exit after their expiry date, making a profit. That, explains Qandil, is why we have recently seen pressures on the exchange rate.

Qandil proposes an opposite scenario, advocating a strong Egyptian pound.

"It helps to curb high inflation and hence reinforce competitiveness in trade, given the high import component."

Qandil says Egypt is losing competitively against its major trade partners, because it has the highest inflation rate among them.

Christophe Besse, head of trade, science and enterprise at the EU delegation in Cairo approves, adding that since 2004, the Egyptian pound has been stable at 7-8.5 against the euro.

But during this period of exchange rate stability, "an accumulation of relative inflation (50 per cent)" has occurred in terms of cost and price which means that Egypt has "lost a lot of its competitiveness."

Capital control is a good solution that can help the economy through managing capital inflows effectively, increasing incentives for long term flows and taxes on hot inflows. "But it is a short term solution."

"We must enhance the quality of our goods and decrease the production cost," says Qandil. Bilateral and regional trade agreement is also a must, she adds.

How to address the structural budget deficit is more important than the currency war, affirms managing director and CEO of Bloom Bank Egypt, Mohamed Ozalp.

"I think fiscal [concerns] is becoming more important for nations," adds Ozalp. The only solution to solve our deficit is to contain inflation, he asserts.

Last year was dominated by competitive devaluation - “currency war”. The war was mainly between Washington and Beijing. China was accused by the EU and United States of devaluating its currency to benefit from trade competitiveness. On the other hand, last November the Federal Reserve went on a $600 billion bond spending spree to revive the U.S. economy, a practice known as “quantitative easing” which floods the market in question with money, boosting inflation and asset prices.

At the last G20 summit, hosted by Seoul, members agreed to "refrain from competitive devaluation" of exchange rates. Though China's yuan rose 0.25 per cent last November and has climbed almost 3 per cent since June 2010, Washington pressed for more swift rise in the currency's value.

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