The exchange rate of the Egyptian pound has to be put in a “package” of pro-growth economic reforms, social protection and better fiscal policy to decrease the balance of payment and budget deficits, said Mohamed El-Erian, chief economic adviser at European financial and insurance services giant Allianz.
“We have to stop obsessing about the [Egyptian pound] exchange rate,” El-Erian, the former CEO of globally-renowned bond investors PIMCO, said in a lenghty interview with an Egyptian satellite channel on Monday. “We have made the exchange rate the biggest element [of the reforms].”
El-Erian’s comments come amid high expectations by economists and local investment banks that the Central Bank of Egypt (CBE) may float the pound soon to tighten the gap between the official and the informal rates of the currency to achieve a $12-billion loan from the International Monetary Fund (IMF) over three years.
A preliminary deal with the IMF on the loan was reached in August.
The CBE kept the Egyptian pound stable against the US dollar at 8.78 on Tuesday’s weekly auction, while the rate on the black market registered EGP 14.80.
“What you see in the parallel market is not the equilibrium exchange rate, it reflects elements of uncertainty, and elements of risk, so it is well above Egypt’s equilibrium exchange rate,” said El-Erian, who spent 15 years working with the IMF.
In February, the investment mogul said that floating the Egyptian pound is not enough to solve Egypt’s economic woes.
El-Erian has praised the government’s economic reform programme, which started in July 2014 and included some measures that may affect lower-income citizens such as subsidy cuts and introducing new taxes.
“The economy can grow much faster if we implement reforms, so these reforms are absolutely necessary and without them the situation would be worse,” El-Erian said, elaborating that it is very important for the government to protect the most vulnerable segment of population.
“Part of a successful programme is continuous communication and feedback with people in the streets to understand the necessity of the reform programme and the considerable upside of Egypt’s economy.”
“The people in the street feel economic insecurity, they see that the growth is not fast enough, they see that incomes are stagnating, they see prices rise too quickly, and most importantly and most correctly, they know that our potential is better than this,” El-Erian said.
El-Erian, a member of the coordinating council of the CBE, hopes to see “a positive confidence shock” among Egyptians, as “right now a lot of people are holding back, waiting to see what is going to happen.”
Source: Ahram Online
