Recent statements by Prime Minister Mustafa Madbouli to the effect that people should not worry if they see the value of the pound against the dollar fluctuating stirred a debate this week.

The rate might fluctuate by up to five per cent in the coming period, Madbouli said on Saturday while inaugurating various projects. “We will not repeat past mistakes,” he said, referring to an earlier assumption that a static exchange rate reflected the strength of the economy.

This belief led to a situation that necessitated the decision to float the currency, causing it to lose 40 per cent of its value.  

Madbouli explained that the exchange rate has been fluctuating in a four to five per cent range since the floatation. He attributed this to normal shifts in the demand for dollars, adding that he expects this trend to continue.

The comments came in parallel to a recent minor depreciation of the pound and were “notable because they show that there is full understanding of the importance of a flexible exchange rate, thus calming investors and markets about the consistency of the newly implemented policy,” said a note by the National Bank of Kuwait on 2 December.

Since May this year, the exchange rate has risen from around LE47.25 to the dollar to just under LE49.7 in most banks with a more consistent depreciation over the past few weeks.

Economist Mohamed Fouad said in comments on television that exchange-rate fluctuations do not in themselves present a problem for the economy as long as entrepreneurs and investors can obtain the hard currency they need for imports from the banks.

In early November, on the eve of the fourth review of Egypt’s loan arrangements with the International Monetary Fund (IMF), the Central Bank of Egypt (CBE) instructed banks operating in Egypt to make dollars available for letters of credit for imports of non-essential goods that had previously required the CBE’s prior approval.

In March 2022, the CBE had instructed the banks not to cover any of the 13 non-essential goods it has listed without obtaining prior approval.

Two days before the press conference last Saturday, Madbouli tried to reassure the public as the exchange rate for the dollar edged towards LE50. “Don’t be alarmed by some increases in the dollar exchange rate,” he said. “It will go down again. We are operating in a free market governed by supply and demand, so we are committed to a flexible exchange rate. What matters most is that there are no delays [in providing hard currency to those who need it]. This is what I want to emphasise, namely that trade and industry must get what they need.”

Madbouli noted that the results of the recent elections in the US had caused the dollar to strengthen against all currencies worldwide. The Egyptian pound is part of the global system, and therefore there was no reason to worry about temporary increases in the dollar’s value, he added.

Moataz Hamed, director of the treasury department at a public-sector bank, said it was important for exchange rates to remain flexible.

“Take, for example, foreign investments in Egyptian treasury bonds in March yielding a 30 per cent return. If investors are not guaranteed a fair exchange rate that assures them profitability on maturity, they will not renew their investment. If they all withdraw at the same time, this will create a problem, forcing the CBE to initiate a new cycle of exchange-rate liberalisation.”

Hamed said that the government has loan obligations to pay off during the next year and a half. This makes it crucial to maintain the hard-currency reserves needed to pay these obligations, especially given the uncertainty of dollar revenues from sources like the Suez Canal and tourism, given the ongoing geopolitical turmoil.

He said that incoming US President Donald Trump’s domestic economic policies might not be favourable to the Egyptian economy. If his approach leads the US Federal Reserve to reverse its policy of lowering interest rates, this will drive up demand for the dollar, potentially diverting investment away from emerging markets such as Egypt.

According to Hamed, the CBE’s policy of maintaining a flexible exchange rate within a five per cent range is consistent with the approach it followed during CBE Governor Tarek Amer’s term from 2017 to 2019.

“During that period, the pound-to-dollar exchange rate fluctuated quite a bit until it stabilised,” he said.

It is better to let the dynamics of supply and demand determine the exchange rate, Hamed said. This reflects the revenues generated from exports, manufacturing, and national development projects, on the one hand, and the government’s obligations in terms of imports and debt-servicing payments, on the other.

* A version of this article appears in print in the 5 December, 2024 edition of Al-Ahram Weekly