What went wrong at the CBE?

Al-Ahram Weekly Editorial
Sunday 28 Aug 2022

With his term due to end in November 2023, the resignation of Central Bank of Egypt (CBE) governor Tarek Amer has taken everyone by surprise.


The timing is rather critical with a new IMF deal in the making and the economy facing a barrage of war-induced challenges including a spiralling rise in commodity prices, the outflow of foreign investments, and unprecedentedly high levels of inflation.  

Coming just one day before the CBE’s monetary policy meeting to decide whether to change interest rates or not, Amer’s resignation was seen by many as evidence that there is a division in policy-making circles around the best way to use monetary tools to deal with the economy’s persistent problems. Amer was an advocate of managed liberalisation of the local currency which means letting it move within a narrow corridor.

Since the 2016 devaluation of the Egyptian pound, losing 50 per cent of its value, Amer’s main objective had been to maintain its value. To do this he opted to withdraw from foreign reserves to avail liquidity and keep the US dollar around the LE16 threshold. Amer defended his policies several times, saying that by default reserves are there to use in times of crisis.

He also depended on the increased appetite of foreign investors in Egypt’s treasury bills and bonds, thanks to the fact that Egypt offers one of the highest yields in the world on its government securities. These inflows fed the CBE’s foreign reserves.

Keeping the exchange rate stable by availing liquidity obtained from foreign currency reserves makes said reserves vulnerable to external shocks like the pandemic and the war on Ukraine, however. Reserves have recently fallen as officials attempted to prop up the pound to end July at $33.1 billion down from over $40 billion at the beginning of 2022.

But the short-lived stability of the currency exchange rate was fake as it was based on the intervention of the CBE in the money market rather than the forces of supply and demand. This created an imbalance in all the economy’s transactions with the rest of the world, mirrored in considerable deficits in the trade balance and current account. This was exacerbated by spillovers from the war in Ukraine.

Over-dependence on foreign portfolio investments made the economy vulnerable to external shocks, what is more. At least $15 billion worth of portfolio investments has fled the country since March.

Such “inflexible” exchange was criticised several times by the IMF and it is believed that more liberalisation of the pound tops the funds demands to sign a new agreement with Egypt, its third since 2016.

The last few weeks saw many international financial houses putting the fair value of the pound between LE23-25, saying this would manage the growing external imbalance and attract foreign capital back into the country.

Another Amer policy that had prompted reservations was the CBE’s decision in March to restrict imports. The import ban on certain products caused supply shortages for several firms and a new requirement for letters of credit for importing many goods resulted in increased customs delays.

All eyes are now on the new CBE Governor Hassan Abdallah, a veteran banker with good relations with the local and international private sector. During a meeting following his appointment, President Al-Sisi told Abdallah that monetary policy should be responsive to global economic challenges, asking him to prioritise improving the country’s investment climate and help diversify its sources of foreign currency.

*A version of this article appears in print in the 25 August, 2022 edition of Al-Ahram Weekly.

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