Compromising the CBE?
The long-awaited banking law bill governing the Central Bank of Egypt has been slammed by opposition MPs as coming too late and compromising its independence. Gamal Essam El-Din reports
Government efforts to reform monetary and fiscal policy have gained new momentum over the last few days as a long-awaited draft law governing the performance of the Central Bank of Egypt (CBE) was provisionally approved by the economic committees of the two houses of parliament -- the People's Assembly and the Shura Council.
Despite the fact that several MPs -- belonging to both the ruling National Democratic Party (NDP), and opposition blocs -- said it came too late and lacked supervisory powers, the bill was generally welcomed during parliamentary debates as a progressive step in Egypt's 13-year-old economic reform programme.
Prime Minister Atef Ebeid, addressing parliament's economic committee, said under the new law -- officially dubbed the Unified Banking Law governing the Central Bank of Egypt, the banking system and foreign exchange bureaus -- the CBE will have greater freedom to draw up monetary policy and greater supervisory powers over the banking system.
According to the CBE's Governor Mahmoud Abul-Oyoun, the proposed law will unify the five main laws dealing with banks -- the Banking and Credit Law (Law 163 of 1957), the Central Bank and Banking System Law (Law 120 of 1975), the Secrecy of Banking Accounts Law (Law 205 of 1990), the Handling of Foreign Exchange Law (Law 38 of 1994), and the Law on Private Sector Contributions to the capital of Public Sector Banks (Law 155 of 1998).
"This merger is a necessary step, especially after the Ministry of Economy was abolished in November 2001. More importantly, it will give the CBE de-facto supervision of all banking operations," Abul-Oyoun said.
Ebeid indicated that the CBE's authority under the new law will primarily be strengthened by the fact that it comes under the direct purview of the President of the Republic. "Unlike the present law, in which the economy minister was empowered with hiring and firing senior banking officials, the proposed law will invest the CBE with absolute power over the appointment of senior officials of its affiliated banks and strict supervision of their performance," Ebeid said.
Under the new law, Ebeid added, the CBE will be required to submit two comprehensive reports regarding monetary conditions in Egypt at the end of every fiscal year to the President of the Republic and the People's Assembly.
To effectively play this role, Ebeid said that the CBE's monetary policy will be formulated by a "seven-member coordination council which will be composed of a balanced number of government and independent economic pundits. This council will include three ministers directly concerned with economic issues, the CBE's governor, and three independent experts highly proficient in monetary and economic policies." The CBE governor will be appointed by the President of the Republic (based on recommendations from the cabinet) for a renewable four-year term in office, he added.
Ebeid went on to explain that one of the major objectives of the proposed law is to make the Egyptian banking sector more competitive. This would involve compliance with the latest international banking standards and encouraging a consolidation of the banking sector. "Egypt needs fewer banks, but with greater financial clout to withstand foreign competition and ensure the highest levels of safety for individual deposits," Ebeid said. He added that the CBE's capitalisation would be raised to LE1 billion in order to face off the monetary and credit challenges of the future. Within the same context, Ebeid said that the proposed law would help facilitate banking deals and procedures, simplify deposits and withdrawals, emphasise transparency and disclosure and ensure the freedom of foreign exchange transfers.
The draft banking law is composed of seven chapters. The first two concern the objectives and internal structure of the CBE and its new system for the supervision of the Egyptian banking sector. The next five chapters deal with the administration of public sector banks, the confidentiality of bank accounts, the mortgage of banking assets, handling foreign exchange and penalties for banking offences.
In their debates, MPs raised two major questions: Why did the bill take one and a half years to reach the People's Assembly? And, why after all this time, does the final draft of the law not give the CBE absolute powers and complete independence to formulate monetary policy?
According to Parliamentary Speaker Fathi Sorour, not only was the law submitted too late, but it was also presented to parliament towards the end of its current session. "Presenting the law just one and a half months before the session adjourns for its summer recess gives the impression that it will pass through parliament in a very short period of time," Sorour complained. Ebeid said that the bill took a long time because it had to be revised by several economic thinkers, opposition parties and the ruling NDP. "This, however, was very useful because the current bill is considerably better and more concise than the one originally drafted almost two years ago," Ebeid added.
Elaborating on the second question, prominent businessman and spokesman for the Wafd Party, Mounir Fakhri Abdel-Nour, complained that the bill strips the CBE of the full independence of its counterparts in developed nations, such as the Bank of England and the Federal Reserve Bank in the US. "These countries surrendered complete powers over monetary and credit policies to their central banks so as not to be manipulated by politicians or make their roles largely symbolic," Abdel-Nour said. Faiqa El-Rifaie, a former CBE governor deputy and an appointed MP, joined forces with Abdel-Nour, emphasising that the powers of the minister of finance and CBE governor are not on an equal footing in the bill. "The fact that the minister of finance will be a member of the CBE's Coordinating Council could tip the balance of CBE policies in favour of fiscal rather than monetary ones. We also know that the Ministry of Finance is usually privileged with political powers great enough to bring the CBE under its sway. The finance minister could use these powers to compel the CBE to adopt policies not necessarily in favour of monetary conditions," El-Rifaie said.
In response, the Minister of Foreign Trade Youssef Boutros Ghali argued that the CBE cannot have the same independence as its counterparts in countries such as Britain, America, Germany or Australia, "simply because we have not yet reached the stage of economic progress they have achieved, in terms of high savings rates and market size." Ghali added that, whereas central banks in developed countries are primarily aimed at setting inflation and discount rates, those in the developing world, such as CBE, must focus on ensuring price stability.
Al-Ahram Weekly Online : 10 -16 April 2003 (Issue No. 633)
Located at: http://weekly.ahram.org.eg/2003/633/ec1.htm