Egypts new central bank governor signals shift in policy

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Egypt’s new central bank governor Hisham Ramez signaled a shift in the bank’s policy from tightly controlling the exchange rate of the Egyptian pound - as it has done for years - to presiding over a more balanced currency market driven by supply and demand, experts say.

Ramez said the bank’s number one priority was overseeing a “balanced” currency market and that the central bank “has all the tools needed to intervene.”

He said “there is no reason to worry” about price movements on Egyptian pound which has lost nearly 6% of its dollar value in the past two weeks. “The situation is not out of control.”

Outgoing governor Farouk el-Okdah, who is stepping down after nearly a decade at the helm, denied his resignation was related to the recent devaluation of the Egyptian pound.

“The last thing I am worried about is the exchange rate of the pound,” el-Okdah said, giving examples from recent history when the pound dropped in value but then recovered. “What’s most important is that we have a stable currency market, prices can go up and down, that’s normal, what matters is that there is stable currency market.”

In a rare reference to politics, el-Okdah said Egypt’s economic problems required political solutions and that consensus and reconciliation were essential to tackling the economic woes.

“The economy mirrors the political situation,” el-Okda said. “For the economy to move forward, the political situation must also move forward.”

The new face

The appointment of Ramez, a veteran banker, to the top job at the bank ends weeks of speculation over who would lead Egypt's central bank at a time of economic crisis.

Ramez, who will officially take over on Feb. 3 previously served as deputy governor for four years from 2008 to 2011 and worked closely with the central bank when he headed the Suez Canal bank. Most recently he headed Egypt’s private sector Commercial International Bank (CIB). Under the new constitution, Ramez can serve a total of two four-year terms.

He is considered one of the top experts on exchange rate policy in Egypt and his appointment is seen as a positive for investors. But he faces a number of challenges, chief among them stabilizing the currency market and his statements on the exchange rate mark a clear shift in bank policy according to experts.

‘Orderly’ currency market

Osama Mourad, a financial analyst, explains that the central bank’s priority has traditionally been managing the exchange rate but since the bank introduced a new auction system for buying and selling dollars last month, the exchange rate is now determined to a larger extent by market forces of supply and demand. As a result, the bank’s focus would turn to ensuring the currency market operates in a balanced manner.

“The priority now is to have an orderly currency market,” Mourad said. “We have been able to get rid of the responsibility of the exchange rate which was seen clearly from the new governor’s statement.”

The pound has lost 5.9% of its dollar value since the end of December when the central bank introduced a new foreign currency auction system to manage the devaluation of the pound. The currency came under pressure after Egyptians rushed to convert their pounds into dollars in the wake of political turmoil, plummeting foreign exchange reserves and a loss of confidence in the government’s ability to handle the economic problems.

Neil Shearing at Capital Economics expects the pound to reach LE7.5 versus the dollar within the next few months and warns that in the absence of external financing from the international monetary fund (IMF), the pound risks a disorderly devaluation in which it could lose up to 50% of its value in a matter of weeks. The pound reached LE6.55 on Thursday.

Shearing says it’s unlikely the central bank would resort to printing money in order to stabilize the price of the currency because it could “completely undermine the pound.”

IMF loan talks

Economists say Ramez will have less control over the currency than his predecessor because the exchange rate of the pound is contingent upon the outcome of loan talks with the IMF rather than monetary policy.

“How far and how quickly the pound falls depends heavily on the outcome of negotiations over a financing agreement with the IMF,” Shearing said.

Egypt is negotiating with the IMF over a $4.8 billion financing package seen as essential to regaining investor confidence and staving off a balance of payments crisis. Talks were put on hold last month in the wake of political turmoil triggered by a constitutional crisis but are due to re-start later this month.

Ramez is also faced with dwindling foreign exchange reserves. The bank’s aggressive intervention to keep the pound stable over the past two years - against a backdrop of political unrest, capital flight and declining tourism revenue - burnt through more than $20 billion of foreign exchange reserves. Reserves reached the dangerously low level of $15 billion in December, barely enough to cover the cost of three months of imports.

Cash reserves are likely to remain weak in the near term despite aid from strategic partners like Qatar and Turkey. The county’s planning minister Ashraf El Araby acknowledged in an interview with Al Arabiya that the government could fall short of its target of boosting reserves to $19 billion by June of this year.

According to Alia Moubayed of Barclays Capital, Egypt has more than $1 billion of debt obligations within the next 6-8 weeks, $900 million of which is due this month. The country is also estimated to have a monthly current account deficit of between $400 - $500 million.

The other challenge Ramez faces is Egypt’s monetary policy and liquidity. Interest rates have remained largely stable over the past few years despite fluctuations in the economy and the bank will need to balance between an inclination to cut rates in order to stimulate the economy and the risk of inflation. Inflation edged up in December to 4.7% from 4.3% in November.

“I think we need to reduce the interest rate to stimulate the economy,” Mourad said, adding that because economic growth was low, a rate cut wouldn’t add pressure on inflation.

Shearing said “there is so much slack in the economy because it missed out on growth for the past two years and firms are not operating at capacity so there is little domestically generated price pressure.”

Still, there is widespread concern that prices could rise with an imminent sales tax hike and some merchants are already raising prices in anticipation of the new taxes. Also, the drop in the value of the pound is making food imports more expensive, adding further pressure to prices.

The bank’s new governor will also need to deal with the sensitive issue of compensation. Under the previous regime, public sector banking employees received compensation in addition to their government salaries from a special fund outside the state’s budget. This was seen as a way to attract top talent to an industry that requires highly skilled and specialized professionals without adding pressure on government finances.

Brain drain?

Since the revolution there have been calls to abolish extra compensation for advisors and expert staff at state institutions and the outgoing governor el-Okda indicated he wanted to do away with the fund for banking workers.

Mourad cautions that a salary cut could cause a ‘brain drain’ with many staffers choosing to work in the private sector or it could force the government to allocate higher salaries from its already stretched budget.

Investors also expect to see changes in the top jobs at public sector banks which are overseen by the central bank and there is concern appointments could be politically motivated which could affect the banking sector’s credibility.

(Carina Kamel is a Senior Business Correspondent at Al Arabiya and can be followed on Twitter @Carina_bn. )