Cairo holds out for foreign cash.

07 March 2003
The government is understood to have requested at least $3,000 million in aid from the US in order to offset economic repercussions from a possible war in Iraq, sources close to the negotiations in Washington say. The financial package will be arranged and disbursed independently from the $1,916 million allocated for Egypt this year, which already makes the country the second largest recipient of US aid in the world (US, MEED Special Report, 28:2:03, pages 22-23).

The emergency assistance is likely to be joined by another one-off injection of $1,000 million in development loans that have been requested from the World Bank. Representatives of the World Bank arrived in Cairo on 3 March to discuss the request, which was first made in early 2002 during a major downturn in the tourist industry but later suspended as economic conditions began to improve.

Local banks are reporting continued foreign currency shortages despite the flotation of the Egyptian pound in January. Financial analysts say the government is likely to request flexible terms for its aid and loan packages so much of the capital can be injected into the banking system to stabilise the pound. Commercial banks remain cautious about trading in foreign currency and the black market continues to flourish as a result, offering average rates of $1=£E 6.75 at the beginning of March, compared with official rates of about $1=£E 5.57. Prior to devaluation, the official pegged rate was $1=£E 4.65.

Economists say that an element of 'overshoot' is to be expected after flotation, but that a truly free market can only be achieved by bridging the exchange rate gap.

'The Central Bank [of Egypt] did provide $1,200 million in reserves to the commercial banks a week ago on the condition that they put this amount back with the central bank as foreign exchange deposits,' explains a local banker.

'This effectively closed out the banks' positions, allowing them to intervene in the market for customers rather than just holding onto foreign currency for themselves. Given that the authorities have chosen to intervene to prevent the exchange rate overshooting, they may use the promise of more money to use their reserves again to 'punish' speculators and close the gap between the official and unofficial rates.'

Egypt has endured five years of flat economic growth and a recession in the tourist industry, the country's main hard currency earner, during which time foreign reserves fell to $14,000 million at the end of 2002, from their peak of $20,000 million in 1997.

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