Egypt's Credit and Monetary Policies
Egypt's monetary policy has changed over the past two decades. The 1991 Economic Reform and Structural Adjustment Program (ESRAP)—adopted in collaboration with the World Bank and the International Monetary Fund—dramatically changed the role of monetary policy, which was geared to anchoring the nominal exchange rate, even after the ERSAP program, until 2003. But the vulnerability of the economy in terms of foreign exchange earnings emphasized the importance of addressing exchange rate issues.
Institutional setup and exchange rate system
The institutional setup of conducting monetary policy from the 1990s to 2003 was characterized by the Central Bank of Egypt's (CBE) lack of independence. In 2003, a new banking law was issued that changed the institutional setup for monetary policy and emphasized the CBE's independence.[1] The Law 88 of 2003 and a number of CBE rules and regulations that ensued also introduced several prudential regulations that often even exceeded Basel II requirements (CBE 2013). In January 2003, a floating exchange rate system was adopted. The IMF classified the exchange rate regime on June 30, 2004, as managed floating with no predetermined path for the exchange rate,[2] but it is better described as a dirty managed floating system.
Recent political developments and monetary policy
Political developments after January 2011 compounded the challenges facing monetary policy. The intended shift from anchoring the nominal exchange rate to inflation rate targeting became more problematic with the fast depletion of foreign reserves.[3] A slight devaluation took place in December 2012, when the foreign reserves were backed by long-term deposits of Arab countries. Economic and financial conditions are imposing constraints on the conduct of monetary policy.
However, the CBE's independence was evident, especially in the unstable period after the January 2011 events. The CBE prudently managed the forex market, through the dollar interbank system, to buffer against drastic volatility (CBE 2011). And the CBE expanded credit to the government and extended liquidity to the system (Herrera and Youssef 2013).
Over the last decade, the CBE has used extensively different tools to manage monetary policy; however, they came up short in fostering the expansion of banks' credit to the private sector for investment purposes. This shortfall is evident in the relatively high liquidity ratios (ECES 2011) and the low percentage of loans to deposits.[4] Reasons behind the limited extension of credit include prudential regulations, limited banks’ ability to manage risks of lending to small and medium enterprises, and incentives for banks to invest in treasury bills, whose issuing increased dramatically in the aftermath of January 25, 2011.
References
- CBE (Central Bank of Egypt). 2011. “Annual Report 2010–2011.” Central Bank of Egypt Publications, Cairo. http://www.cbe.org.eg/NR/rdonlyres/C3AEDCD4-A959-4911-850E-C5483B61E99C/1363/AnnualReport2011Eng.pdf.
- ———. "Monthly Statistical Bulletin." Various issues. Central Bank of Egypt Publications, Cairo. http://www.cbe.org.eg/English/Economic+Research/Publications/, 2011–13.
- ECES (Egyptian Center for Economic Studies). 2011. “Monetary Policy in Egypt: Recent Challenges and Future Priorities.” ECES Policy View Point Number 28, June. Cairo: Egyptian Center for Economic Studies. http://www.eces.org.eg/Uploaded_Files/%7B7B241CAA-3E74-4E1D-99B8-81E2BEA42D77%7D_PVP28-Eng-6pages.pdf.
- Herrera, Santiago, and Hoda Youssef. 2013. “Macroeconomic Shocks and Banking Sector Developments in Egypt.” Policy Research Working Paper No. 6314, Middle East and North Africa Region, Poverty Reduction and Economic Management Department, World Bank, Washington, DC, January. http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2013/01/15/000158349_20130115091848/Rendered/PDF/wps6314.pdf.
- Hussein, Khaled, and Ahmed Nos’hy. “What Caused the Liquidity Crisis in Egypt?” http://www.mafhoum.com/press7/200E14.pdf.
- IMF (International Monetary Fund). “Classification of Exchange Rate Arrangements and Monetary Frameworks.” http://www.imf.org/external/NP/mfd/er/index.aspx.
- Kraay, Aart. 2007. “The Welfare Effects of a Large Depreciation: The Case of Egypt 2000–2005. World Bank, Washington, DC, July. http://siteresources.worldbank.org/DEC/Resources/KraayEgyptWelfareEffectsLargeDepreciation.pdf.
[1] The CBE’s Monetary Policy Committee (MPC) is responsible for taking monetary policy decisions. It has nine members comprising the governor of the CBE, two deputy governors, and six board members. The MPC convenes every six weeks to decide on its policy rates and issues a communiqué immediately thereafter to inform the public and anchor inflationary expectations. See the Monetary Policy Framework published by the CBE: http://www.cbe.org.eg/English/Monetary+Policy/What+is+Monetary+Policy/The+CBE+Monetary+Policy+Framework/.
[2] International Monetary Fund, “Classification of Exchange Rate Arrangements and Monetary Frameworks,” http://www.imf.org/external/NP/mfd/er/index.aspx.
[3] CBE "Monthly Statistical Bulletin," various issues, Central Bank of Egypt Publications, http://www.cbe.org.eg/English/Economic+Research/Publications/.
[4] Ibid.
Ahmed Ghoneim is a professor of economics in the Faculty of Economics and Political Science at Cairo University. He is a research fellow at the Economic Research Forum for Arab Countries (ERF) in Egypt, and at the Center for Social and Economic Research (CASE) in Poland.
The views expressed here are solely those of the author in his/her private capacity and do not in any way represent the views of neither the Arab Development Portal nor the United Nations Development Programme.
