CAIRO, 6 May 2003 — Egypt’s Central Bank Governor Mahmoud Abu El-Ayoun said on Sunday the Egyptian pound, which has declined by about 20 percent against the dollar since it was floated in January, was now undervalued.
He also told Reuters in an interview that Egypt’s external position was “solid,” with a balance of payments and current account surplus, falling foreign debt and rising reserves.
The pound is currently officially traded at about 5.91 to the dollar, while black market rates hover around 6.20-6.25.
“It (the exchange rate) is overshooting ... I think that the Egyptian pound is really undervalued,” Abu El-Ayoun told Reuters in an interview. He declined to say what he thought the fair value would be, or when the pound might reach such a level.
But he said current parallel market rates, which have recently been steady while official rates kept weakening, did not reflect the pound’s true value.
“The market rate, if you’re talking about the parallel rate, is just numbers. We can’t see the transactions taking place. If it is a stable number doesn’t mean it reflects the market,” he said. Some analysts have said the black market rate may have overshot the pound’s fair value as the market adjusted to the new liberalized foreign exchange system. While dollars are more readily available than immediately after the float, many hard currency holders are still reluctant to part with their money until the pound rate stabilizes.
Despite concerns among some economists and analysts that the float has been more “managed” than “free,” Abu El-Ayoun said he was satisfied with the currency liberalization so far.
“I can say that we are (moving) in the right direction,” he said. “As far as I am concerned, I can say that the levels that have been reached in the market so far were expected ... The overshooting was expected ... I’m proud that we have taken this decision.” The governor also said Egypt’s external position was “solid,” adding that foreign reserves had climbed to $14.148 billion in March from a January figure of $14.08 billion. February figures have not yet been released.
“Our reserves by the end of March were $14.148 billion. That’s also another good number for us,” he said.
Abu El-Ayoun also said the economic impact of the Iraq war on Egypt — the Arab world’s most populous country with almost 70 million people — would probably be less than expected, adding that the economy was “doing fine so far.” He said the economic situation meant the government had not, and would not, request the release of $500 million in quick disbursing funds offered by the International Monetary Fund last year to help cover a forecast current account deficit. “The external position of Egypt is still solid. Based on the figures that we announced by the end of December, the balance of payments was in surplus. The current account was in surplus as well. We didn’t see any indicator of deterioration in our external position,” Abu El-Ayoun said.
“Our international debt has gone down. Today I have just announced the (foreign) debt figure for March, which is $28.7 billion, less than what was reported in the December figures,” he added. Previous figures had put the debt at $28.8 billion.
Government officials have estimated Egypt would lose $4 billion to $8 billion in revenue due to the war, and reduced currency flows from tourism, exports, investment and remittances. Asked if these estimates still looked realistic, Abu El-Ayoun said: “We think it will be less than that ($4 billion).”