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Egypt: What significance for changes at the Central Bank?

Ziad Bahaa-Eldin , Wednesday 28 Oct 2015
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The topic of the day remains the economy because it is understandably what causes the most concern. Even the ongoing parliamentary elections fade in importance compared to citizens’ preoccupations with the current economic crisis.

The latest development on this front has been the resignation of Hisham Ramez as governor of the Central Bank of Egypt and the appointment of Tareq Amer to the position. But this will not be enough to stabilize the national economy, calm markets, and restore investor confidence because personalizing the economic crisis is unhelpful.

True, the former and current CBE governors each have their own distinct style, rhetoric, and priorities. But ultimately the problems and circumstances are the same.

Thus, the public must be made aware that the role of the Central Bank is not simply to supply dollars, nor to wage war on exchange bureaus, or prop up the Egyptian pound under any circumstances.

The role of the CBE is to use monetary policy to support the government in implementing an economic policy that encourages investment, production, and export. And here is why.

It isn’t the CBE’s job to come up with foreign currency.

The availability of hard currency ultimately depends on the country’s capacity to export goods and services (including tourism), attract foreign investment, and encourage remittances from Egyptians abroad.

This is in addition to international grants and loans. Currency availability is also linked to the magnitude of imports and Egypt’s external obligations. Without the right policies and a sound economy, the CBE’s ability to provide foreign currency will remain limited.

Nor is the Central Bank’s job to eliminate exchange bureaus. Running these bureaus is a legal, honorable profession, regulated by law, which sets forth licensing conditions, rules, and oversight mechanisms.

And like any other profession, there are some who operate honestly and others who don’t, but the media’s depiction of currency traders as greedy thieves exploiting the country is naïve.

It’s also damaging, because it leads the public to believe that getting rid of exchange bureaus is a national goal, though exchange companies provide a service to the economy and society. It’s the duty of the CBE to regulate their activities and identify bad actors, not to go to war with the whole sector.

Finally, the job of the CBE is not to maintain the price of the pound at one unchanging rate. The time is long past when the national currency was seen, like the national flag, as a symbol of sovereignty and dignity that the Central Bank had to defend at all costs.

It’s natural for the price to rise and fall as the state’s external balance with the rest of the world shifts or, when necessary, in order to boost the competitiveness of the national economy.

However, the problem recently has not been the falling price of the pound per se, but rather the severe market disruption, the decline in national cash reserves, and the restrictions on foreign currency transactions.

Instead, we should raise public (and hopefully, media) awareness that the task of the CBE is to oversee the banking system, set rules that safeguard depositors’ money, maintain the integrity of the payments system, and apply monetary policies that achieve stable prices.

The CBE should also act to encourage economic activity, provide funding for the state when necessary, and manage pound and foreign reserves. Last but not least, the CBE functions as the lender of last resort for banks and the banking sector.

What we really need is to abandon the mindset that assigns overwhelming importance to changes in leadership and instead change policies. We need to avoid raising expectations unreasonably and stop seeing the root of the problem as currency traders, importers, or particular individuals. That may appease the public’s rage, but it will not bring progress or stability.

We also need a clearly defined economic policy, understood by society, that encourages the private sector to invest, produce, employ, and export, while also spurring the state to exercise its oversight authority to protect and regulate markets and its social role to protect vulnerable groups and correct social imbalances. This is not just fine talk—it is a need dictated by Egypt’s economic and social conditions and the challenges of development.

The CBE is not a passive party in all this, but a major player. It has the power to stimulate the economy, push the banking sector to offer various services, and influence the size of available credit, currency prices, and market behavior more generally— provided that it acts based on a clear economic plan and priorities agreed upon with society.

***
Finally, I’d like take this opportunity to thank Hisham Ramez for his great efforts in the face of the serious responsibility he assumed in extremely difficult conditions, and wish Tareq Amer success in his coming mission.

The writer holds a PhD in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment.

This article was published in Arabic in El-Shorouq newspaper on Tuesday, 27 October.

 

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