Attention, Egyptian black-market currency dealers: It's time to keep your head down. The police are out in force. They're rounding up the money changers who buy dollars at an 18% markup over the official exchange rate. And they're cracking down on importers of clothing and appliances.
Unlikely as it seems, the police are key agents of President Hosni Mubarak's macroeconomic policy. Mubarak is convinced that the exchange rate of the Egyptian pound is a barometer of the stability of his government, so he must defend it at nearly all costs. But the pound has been sinking steadily for the past two years. In January, 2000, a dollar bought 3.4 Egyptian pounds. Now, it buys 4.5 pounds. Black-market money dealers are signaling by the rates they offer--5.35 pounds per dollar--that the currency is even weaker than the government says it is.
That's why Mubarak is taking drastic measures to defend his currency. And he is calling in his international chits. The President wants big foreign bucks to help him cover a projected $2.5 billion current account deficit this year, partly caused by the plunge in tourism revenues after September 11. The government made its plea at a gathering of international donors assembled by the World Bank on Feb. 5-6 at Sharm el Sheik, the resort town on the Gulf of Suez. The message: If the international community doesn't help out, there could be rioting in the streets. Donors pledged $10 billion over the next three years. The U.S. has agreed to $380 million in accelerated aid, bringing this year's tab to $1 billion and the bill for the past three decades to $25 billion.
But the money will be wasted, critics say, if Mubarak uses it to shore up an unrealistic exchange rate. Meanwhile, capital flight continues as consumers try to preserve their savings. Even with restrictions, Egyptians find ways of turning their pounds into dollars and spiriting them out of the country. One popular ploy is to say dollars are needed to pay for a pilgrimage to Mecca--a hard request for the government to deny. Economists estimate Egyptians send as much as $4 billion out of the country each quarter.
Rather than fighting exchange-rate wars, Egypt's businesspeople would like Mubarak to come up with a coherent policy that restores business confidence. In the mid-1990s, Egypt seemed to be on its way to becoming a hot emerging market with a thriving stock exchange and growing private sector. But Mubarak, fearful that layoffs would spark criticism, halted privatizations and other reforms. Egyptians who had repatriated billions of dollars began sending their capital out once again.
To stem the outflows, Mubarak has increased the red tape necessary to acquire dollars and has kept interest rates high--at 12%--for the past two years. But that has hurt Egyptian companies, which must wait a month to get dollars in large quantities for business deals. The combination of high rates and scarce dollars has kept the private sector in recession since 1998. The private sector, which makes up almost three-fourths of the economy, is expected to shrink 4% this year.
Meanwhile, currency and economic uncertainty have scotched acquisitions such as Standard Chartered Bank's efforts to buy Cairo-based Egyptian American Bank and a Saudi investor's effort to acquire the Cairo Nile Hilton. "It is a pretty grim picture," says Paul Albisser, managing director of Nestlé Egypt, which employs 2,000 people. "The uncertainty affects all industries."
Fortunately for Mubarak, Egypt's finances are not yet in the totally desperate zone. "We can't compare it to Argentina," says Moustafa el-Sahn, general manager of J.P. Morgan Chase & Co. in Egypt. The country still has $14 billion in foreign-currency reserves on hand, enough to cover almost a year's worth of imports. Still, there is little doubt that Egypt is drifting into deeper trouble. And business fears Mubarak's fixation on exchange rates will not halt the slide.
By Susan Postlewaite in Cairo and Stanley Reed in London
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