15 - 21 November 2001
Issue No.560
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Al-Ahram Weekly Online 15 - 21 November 2001 Issue No.560 |
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Independence for Central Bank
President Mubarak has dismantled the Economy Ministry and given control of monetary policy to the Central Bank. Gamal Essam El-Din asks why
Dividing his attention between Middle East peace-making and the nation's economy, President Hosni Mubarak said on Sunday that plans are under way to dismantle the Economy Ministry and replace it with a Ministry of Foreign Trade. Returning from a trip to the United Arab Emirates and Kuwait, Mubarak told journalists that the new ministry will be primarily in charge of boosting exports and drawing up import policies.
Mubarak also indicated that the Central Bank of Egypt (CBE) will enjoy greater freedom to make economic policy. "The CBE will be completely independent in formulating monetary and credit policies," Mubarak said.
Mubarak's decision took economic observers by surprise. It was announced while Economy Minister Youssef Boutros Ghali was outside the country, representing Egypt at the fourth ministerial conference of the World Trade Organisation in Doha, Qatar. Ghali now Minister of Economy and Foreign Trade, is expected, however, to keep the foreign trade portfolio.
Analysts believe that there are two factors behind Mubarak's decisions: the economic fallout of the 11 September attacks against America and deteriorating relations over the past months between CBE Governor Ismail Hassan, now retired, and Ghali.
Regarding the economic reasoning, analysts, who feel that the government has been slow to respond to the economic consequences of 11 September, lauded Mubarak's intervention. As well as announcing the new policies, Mubarak has deemed the economic situation sufficiently urgent to call for a concerted national effort to mitigate the effects of the global slowdown. "This call was repeated in the two speeches which President Mubarak delivered before the parliamentary group of the ruling National Democratic Party (NDP) and before a joint session of the of parliament and the Shura Council," Mustafa El-Said, a former economy minister, told Al-Ahram Weekly.
Regarding the clash between the governor and his government counterparts, El-Said commented that since Egypt launched its economic reform programme in 1990, the CBE and the government have been involved in a tug-of-war over monetary policy. The situation reached a nadir just as the foreign exchange squeeze was throttling the economy in the summer of 1999. Then Prime Minister Kamal El-Ganzouri refused to acknowledge there was a crisis, forcing the governor to subordinate the bank's policies to the government's view. The result was that Egypt's foreign exchange reserves at the CBE dropped from the 22.9 billion US dollars it held in 1996 to just 15.6 billion US dollars when El-Ganzouri left office in October, 1999. They now stand at 14.2 billion US dollars.
"Monetary policies while El-Ganzouri was in office were largely motivated by political interests rather than by sound economic criteria," El-Said said. "El-Ganzouri was keen not to give his rivals in the ruling party a chance to criticise him before President Mubarak. This conflict [between the government and the CBE] left the CBE and economic policies in a shambles."
When Ghali became economy minister in October 1999, it was initially believed that he would strengthen the CBE as an independent institution. That hope proved unfounded. Ghali appointed his senior adviser, Mahmoud Mohieddin, to the CBE board and brought Hassan into the cabinet's six-minister economic group over which he, Ghali, presides. "This reinforced the idea that the CBE is nothing more than a government tool," El-Said said.
In recent months, and as the exchange rate crisis has worsened, relations between the CBE and the Economy Ministry have deteriorated. Hassan appeared to be fighting a losing battle. Ali Negm, a former CBE governor, said in a recent Cairo University symposium that the clash between Ghali and Hassan reached a climax a month ago. Hassan decided that bank clients should not be allowed to withdraw more than LE20,000 per day so cash liquidity in banks would not be negatively affected. But Ghali annulled that decision the following day on the grounds that it undermined client confidence, Negm said.
Hassan, 66, is believed to be the first senior official to refuse to have his term prolonged. This caused a problem for the government and the post of CBE governor remained vacant for 23 days. Eventually Hassan was replaced by his deputy, Mahmoud Abul-Oyoun, 49.
Economists differ over how the CBE should be provided with greater power. President Mubarak indicated that the CBE will cease to be subject to any ministry. "The CBE will from now on come under the purview of the cabinet," Mubarak said.
A group of economists, however, think that the CBE law, 120 for 1975, should be amended to give it greater independence. Ahmed El- Ghandour, a Cairo University economist, thinks that the CBE law should be reformulated to make the CBE the sole arbiter of monetary policy, like the US Federal Reserve Bank and the Bank of England. Other economists believe the law already gives the CBE sweeping powers but they are rarely used and need to be activated.
The 1975 law gives CBE operational responsibility for setting interest rates, drawing up monetary policy, devising an inflation- dampening exchange regime and exercising effective supervision over affiliated banks. The law also gives the CBE main responsibility for dealing with the repercussions of global economic crises and advising banks on bad loans. Loans made to bad debtors equal 13 per cent of the deposits in Egypt's banks.
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