The Egyptian government has announced a new program to control inflation, which has been steadily rising since January, when the government allowed banks to fix their own interest rates. In the weeks since then, the Egyptian pound has lost about 20 percent of its value against the U.S. dollar. The government, among other things, has decided to freeze the price of such basic foods as sugar, flour, wheat and rice.
The Egyptian government has frozen the price of 15 food products for an unspecified period of time and will stop government imports for three months. The government has taken these steps in an effort to deal with a severe shortage of dollars and boost the very weak local currency, the Egyptian pound.
For decades the pound has been pegged to the dollar and the government fixed the exchange rate. But in January, in an attempt to revive export and tourism revenues, the government decided to float the exchange rate, allowing banks to adjust their own prices. The exchange rate had been about 4.5 Egyptian pounds per dollar. But since January it has jumped to almost six pounds.
The devaluation has caused prices to rise dramatically throughout the Egyptian economy and has done little to attract new dollars. That's why the government has frozen prices for basic food products and stopped government imports of things like vehicles, office equipment and other supplies.
Ahmed Galal, the head of the Egyptian Center for Economic Studies in Cairo, acknowledges the Egyptian economy is currently suffering under the floating exchange rate, but he says that, given time, Egypt's economic problems will begin to subside as the country learns how to deal with its new floating exchange rate.
"Usually it takes two or three months before things settle down because all market participants now need to learn how to cope with the new regime," he said. "Now the exchange market works under a float where nobody is fixing the exchange rate, neither the banks nor the central bank nor anybody else. And usually during that period it always does happen that immediately after the float you get fluctuations in the exchange rate in ways that are not quite where the exchange rate settles eventually. So, how long does it take? Depends on how soon everybody learns how to behave in a new market. Moreover it also depends on what the central bank does or doesn't do. I mean if the central bank, for instance, doesn't raise the interest rate in the short run, doesn't inject enough foreign currency in the market to calm down to satisfy demand and make sure there is enough supply, then that period is prolonged."
Along with freezing the price of basic goods and stopping government imports, the Egyptian government is negotiating a $1 billion loan from the World Bank to increase the supply of dollars. It is also moving to increase interest rates in an effort to attract foreign investment.
In the meantime, dollars remain scarce and some banks are limiting hard currency withdrawals to $10,000 a day, irrespective of the size of a customer's deposits with the bank.
