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interbank rates reveal hand, not policy,
of cbe
recently, the role of the central bank of egypt (cbe) – particularly
its handling of monetary policy – has come under scrutiny.
confusion over regulations governing dollar withdrawals emerged
in october, and the bank seems to have recently been defending the
pound, as revealed by fluctuations in the median overnight interbank
rate. (meanwhile, the pound has shown signs of stabilizing in the
last few weeks against the dollar, falling from highs of £e
3.96-3.98 in mid-september, to a current £e 3.84-3.86.)
interbank rates are generally high on sunday as banks adjust their
balance sheets, and fall towards the end of the week. in november,
the trend has been more erratic, with the rate peaking midweek as
well as at the beginning of the week. on november 16 – a thursday
– the rate was a whopping 12 percent, whereas at the same time
in october it was 4 percent. this suggests that the central bank
is selling dollars, in defense of the egyptian pound. a capital
market authority initiative aimed to ensure that foreign investors
quickly receive their dollars may also have something to do with
the unusual rise.
in financial daily al alam al youm on november 8, amr al geneiny,
assistant general manager at the united bank of egypt, attributed
rising interbank rates to "the fact that the cbe provides banks
with all their dollar needs, for which they pay in egyptian pounds.
this in turn causes a cash shortage."
the relationship between the market’s supply of cash and interbank
lending rates – the interest rate at which banks lend money
to one another – is a sensitive one. when the central bank
sells dollars, the supply of egyptian pounds in the market is reduced.
this pushes interest rates up, as banks compete for scarcer funds.
the central bank can then inject more egyptian pounds into the market
through repose, by which they buy back government treasury bills
held by banks. this in turn reduces interest rates. this is a standard
means of controlling money supply the world over. however, in egypt
it is difficult to know exactly what the central bank’s monetary
goals are.
it would help if analysts and investors knew exactly how much foreign
currency the cbe was putting into the system. a source within the
economy ministry, meanwhile, has questioned the credibility of central
bank figures.
legislation has recently been drafted which may change the central
bank’s role in the formation of monetary policy. under the
new bill (which will probably be reviewed in the next session of
parliament), the cbe would report directly to the president instead
of the minister of economy. the regulatory role of the bank would
be expanded to include supervising securities, leasing companies
and providing mutual funds.
but what of the central bank’s current role as currency regulator?
so far, hopes that the ongoing currency devaluation might bring
additional foreign investment for egypt have failed to bear fruit,
and in the absence of any policy statement from the government,
investors have been holding back. analysts say that investors, both
local and foreign, are afraid – not surprisingly – of
a currency in such a state of flux. but capital flight is not as
massive as last month, when the market hit an all-time low and the
rapid devaluation of local currency was showing no sign of abatement.
"i don’t think foreign investment is pulling out of egypt
as aggressively as it once was," said an institutional broker
at a major cairo-based investment house. "and slow progress
is being made on this issue," he said, referring to a spate
of offerings ready to be made, presumably, as soon as the economic
climate improves.
the economy ministry source said optimistically that although "bankers
and investors are concerned and disappointed, they haven’t
written egypt completely off the map yet." he went on to stress
the importance of egypt’s credibility in the world market,
saying that it isn’t just a matter of officials saying "everything’s
okay."
credibility is important, but part of the problem may be a difference
of emphasis. egypt under the present regime has employed a "managed
float" currency policy for the last 10 years, albeit more on
the "managed" side than the "float" side. but
"if your economy is sinking," warned the ministry official,
"it doesn’t matter what policy you use." while some
things are easy to fix, he explained, like numbers and statistics,
others, like market credibility, are less repairable. "we have
to have a predicable monetary policy," he said, subtly pointing
a finger at the cbe’s "massive injection" policy.
"this is the last chance – today – for the current
management of the central bank to establish credibility," he
warned. "the final test will be in the market."
in the medium term, the bank could weight the pound against a basket
of currencies rather than the dollar, which would encourage monetary
stability and reflect egyptian trade with europe. this latter stands
to become more important after an upcoming eu-egypt trade agreement
is signed, although "the euro isn’t performing so well
these days to hitch your currency to it," the economy ministry
official added.
some analysts are saying that what is needed from the government
is a commitment to a stable exchange rate, rather than a fixed one,
in which the central bank would not be responsible for fixing the
currency. others disagree.
"the exchange rate shouldn’t be taken out of the hands
of the central bank," said the senior analyst of a major cairo-based
brokerage firm. "the central bank – as a theoretical institution
– must be involved in monetary policy, if perhaps with the
cooperation of government officials. that’s how it’s done
in the us, in europe, in developed countries."
the analyst, who thought that the current "crisis of devaluation"
had been sensationalized by the media, said that "the exchange
is really quite stable. to say that the exchange rate is ‘volatile’
and ‘falling rapidly’ is wrong." and at what point
will the pound stabilize? "it will stop wherever market forces
tell it to stop," he said.
jonathan silk
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