Egypt’s new Central Banker: High expectations, but no action so far

The business community has high hopes for new Central Bank of Egypt (CBE) Governor Tarek Amer, but at the close of the first banking day since he officially took the helm, analysts have little new information to judge on.

In Sunday’s currency auction, the CBE held the Egyptian pound’s exchange rate steady at LE7.73 to the dollar. This gave no clear signal as to whether Amer eventually plans to introduce a sharp pound devaluation, hold the currency steady or introduce two-way volatility in the market.

At the stock exchange, where traders have been keeping a close eye on monetary policy, the news appears to have been met with a shrug. The benchmark EGX30 index rose by 0.8 percent within 45 minutes of trading opening Sunday morning. The market leveled out by mid-session as news of the auction rate spread, an indication that traders were neither encouraged nor distressed by the pound’s lack of movement. Throughout the afternoon, the index held relatively steady to close the day up 0.78 percent.

Meanwhile, speculation about interest rate policies under Amer — which has heated up since the introduction of high-interest savings vehicles earlier this month — will also remain unsatisfied. Egypt’s monetary policy committee is not scheduled to meet and discuss interest rates until December 17.

In with the new, out with the old

Amer’s predecessor Hesham Ramez was frequently criticized for his management of Egypt’s monetary policy, particularly the price and availability of dollars.

Facing slower-than-expected growth and high inflation, Ramez defended the Egyptian pound against the US dollar, even though that resulted in a rise of the pound against other global currencies like the euro.

This resulted in an official exchange rate that many analysts believe was overvalued, and put pressure on Egypt’s dwindling foreign reserves.

“When we overvalue the local currency, we are harming ourselves. This was the mistake over the last year. All the currencies of the developed world depreciated compared to the dollar, while we devalued by just 10 percent,” said Raouf Ghabbour, CEO of automobile manufacturer Ghabbour Group, at a recent business conference.

Even more unpopular was a series of currency controls introduced in February that aimed to suppress the currency black market.

These new policies limited how many dollars businesses could deposit in bank accounts, setting a cap of US$50,000 per month. These deposit limitations were intended to dry up demand in the black market by barring businesses from purchasing large quantities of dollars from currency traders and then depositing the currency in their bank accounts.

Ramez’s policies failed to suffocate the black market or bring more dollars into the banking system, said Cairo University economist Fahkry al-Fiky.

“He couldn’t. With all my due respect, he tried to, but at the end there was a scarcity of dollars in the official channels, while enough dollars were in the parallel market,” Fiky said.

Currency traders knew how to get dollars from Egyptians working abroad, he added, with the end result that at least 75 percent of dollars coming into Egypt went into the parallel market.

Instead of killing off the black market, Egyptian businesses say these currency controls have seriously harmed both the import sector and local industry.

“We are not buying fiesta goods. We are buying industrial goods, and we are not able to pay for them,” one businessman, Hesham Amin, expressed his frustrations.

“We are facing a disaster in exporting and importing because of the bad fiscal and monetary policy,” said Ghabbour. “In 40 years, we never faced such a problem with the availability of dollars.”

“How can we export when we don’t have foreign currency,” said Cairo University economics professor Alia al-Mahdy. “If I were the CBE governor, I would give priority to exporters, because exporters bring in foreign exchange.”

Other experts also have advice for the new governor.

“Today we have a very serious problem that can only be tackled by having a foreign currency devaluation,” said Magdy Tolba, chairman of the Cairo Cotton Center. However, the CBE can’t ignore the inflationary impact of a poorly managed devaluation, he said, or “there will be a rebellion from 90 million people who have to eat.”

Others emphasize the need for the CBE to better coordinate policy with the Finance Ministry and the rest of the government. Although the Central Bank of Egypt is officially an independent body, its policies are in constant interaction with those set by the Cabinet and the local banks, and many felt Ramez failed to communicate well with other economic authorities.

“I think there wasn’t enough coordination between the CBE and the finance minister, but hopefully this is going to change,” said Yasmine Abdel Razik, a member of President Abdel Fattah al-Sisi’s economic development advisory council.

A presidential decree issued November 29 reshuffled the committee at responsible for liasing between the Central Bank and the government. It now includes high-profile figures like former CBE Governer Farouk al-Oqda and prominent economist and bond trader Mohamed al-Erian, further raising hopes of increased collaboration.

Tolba said he hopes the new governor will listen to economic expertise coming form all sectors, especially industry. “Decision makers, whether the CBE governor or the president — they understand some things, but they cannot understand everything,” he said, “so they need to listen.”

Isabel Esterman 

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