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The events of the past six months have shaken Egypt’s economy, drying up tourism and leaving international investors leery.
But Egypt’s uncertainty has so far passed without any large shocks to its currency value or skyrocketing inflation, thanks to Egypt’s Central Bank, a largely secretive body responsible for managing the money supply.
“The Central Bank has been extremely clever in the period leading up till now,” said Ahmed Ghoneim, a professor of economics at the University of Cairo.
Ghoneim said the bank has carefully managed the value of the pound, keeping it slightly artificially high.
The Egyptian pound devalued little in the past six months. The exchange rate changed one tenth of a pound, from LE5.7959 per US dollar on 13 January, just before the protests started, to LE5.8958 per dollar on 3 March, according to Central Bank statistics. The Egyptian pound is technically a floating currency, but is tightly managed by the bank to maintain a stable exchange rate with the US dollar.
The bank also said there was an overall 3.7 percent increase in prices from January to April, a modest change for a country in a routine fight with inflation.
The bank took some prompt measures in the middle of the unrest and successfully mitigated panic that could have crippled the economy, said Salwa Antary, an economist and former general manager of the National Bank of Egypt. It injected currency into banks and put limits on transfers of foreign currency and withdrawals. It also cut the badly hit tourism industry some slack, not penalizing tourism businesses for defaulting on loans.
“You have a situation where you have to take care of a lot of things, and make compromises, and still keep an eye on the credibility of the Egyptian banking system,” she said. “I think, up until now, they did a good job with all this.”
Other countries have not managed the transitions and revolutions so well. After the 1979 revolution in Iran, the dinar’s value plunged from about 70 per dollar to over 1000. The government refused to acknowledge the decline, and two exchange rates emerged, one that ruled on the black market and another artificially set by the government. Iran’s economy has yet to recover, and its currency is still weak compared to the dollar.
But the coming months will undoubtedly pose challenges, and it is unclear what the bank’s policy will be going forward.
A devaluation of the currency may become necessary, Ghoneim said, to respond to market forces. Devaluation would make the pound worth less compared to the dollar and other currencies, resulting in more expensive imports as well as potentially higher inflation rates.
Egypt’s Central Bank, officially established in 1961, has the first objective of “realizing price stability and the banking system soundness,” according to its website, but it also keeps an eye on the liquidity, or the amount of cash changing hands in the economy and sets interest rates.
It has traditionally aimed to keep interest rates and the value of the pound high and stable, both of which are meant to keep prices of consumer goods from rising. High interest rates also draw more foreign money to Egypt’s banks.
In addition, it also keeps tabs on Egypt’s external debt. The bank is meant to be an apolitical body, and by decree, its governor is appointed.
The bank’s most significant communication with the press and public are its monthly bulletins, which give the vital statistics for the country’s economy, and occasional appearances by the bank’s governor at press events. When Al-Masry Al-Youm asked for comment on this story, a bank official said they could only offer the bank’s monthly report.
Since Mubarak stepped down, the governor has kept an even lower profile.
“Since the revolution, the guy didn’t appear,” said Ghoneim of the bank’s current governor, Farouk El Okdah. He acknowledged the bank’s leader “needs to be visible, but not too visible,” but worried that his prolonged absence might not have a soothing effect on the markets.
“People, and investors, they need to be reassured,” he said.
The bank’s most noteworthy move in the last decade came in 2003, with its announcement to move the Egyptian pound from a fixed rate pegged to the dollar to a floating exchange rate that would more truthfully represent the pound's value against international currencies. A floating currency rate is usually a sign of a healthy and growing economy that is beginning to hold its own in international markets.
The floating policy, though, Ghoneim said, has not been truly floating. Instead, the bank has allowed small fluctuations in the value of the pound against the dollar, pursuing what economists call a “dirty management” policy with the Egyptian pound.
"I cannot recall that since the revolution a US dollar exchange rate has changed more than a few piasters,” he said.
This means that the pound is still valued and compared to the dollar, and Central Bank officials work to keep it within un-disclosed boundaries. This policy is practiced by many countries with small-to-medium sized economies that cannot compete with powerhouses like the United States and China.
The danger is that to keep the pound low, Egyptian banking officials have been pulling from the country’s foreign currency reserves, using them to purchase pounds, thus keeping the demand high. The reserves, some worry, could be depleted if this continues.
“The market is very prone,” said Ghoneim.
The bank’s May statements report the country’s foreign reserves have decreased by LE16.4 billion in the last year, roughly 6 percent, a drop that, while worth noting, does not seem perilous.
There are enough foreign reserves for the next six months, Antary said, which is enough according to international standards and not cause for worry. She’s hopeful that foreign investment will once again swell the reserves as the country grows more stable.
“I hope that security will prevail again, because this is the essential factor,” she said.
The bank has shepherded the country through difficult times before, such as the 1997 shooting at Luxor, coinciding with the South East Asia economic crisis. Then, bank managers reached into the money supply to prevent the pound from sinking too low.
This time, though Ghoneim’s not sure the bank can avoid devaluation. Reserves might not be deep enough in six month’s time, he said.
“They cannot resist market forces,” he said. “They will have to devalue.”
A recent visit to the bank shows its discreet importance. Military police and a large tank stand out front. No parking is allowed in front and picture taking is frowned upon. It is a modern marble building with Arab-inspired details with hundreds of offices and employees, whose jobs are to keep Egypt’s economy healthy amid the expansions and contractions that happen in a capitalist free-market system.
It has, at least, stayed out of the public eye for corruption or ties to the Mubarak regime, and the purging that has happened in other governmental agencies.
“There are no worries about the Central Bank being clean,” said Ghoneim.