Tarek Amer, the new governor of the Central Bank of Egypt (CBE), returns after an absence of about seven years, having formerly served as deputy governor of the CBE from 2003 until 2008.
During this period, Amer participated in the implementation and preparation of the reform programme for the monetary policy and the banking sector.
The new governor of the CBE faces six major challenges in the upcoming period, as he is responsible for managing the monetary policy of the state.
These six challenges are: controlling the exchange market, rebuilding the foreign reserves, controlling inflation, balancing interest rates in a manner that serves the investment and does not affect inflation, employing banks’ accumulated liquidity, and covering the budget deficit.
Adjusting the exchange market
The management of the foreign exchange market is among the most important functions performed by the central bank in any country. In Egypt, this file was and still is the most difficult of all the files managed by the CBE, and will require a great effort from the new governor.
Managing and controlling the exchange market in Egypt has become dramatically harder during the years following the 25 January Revolution. This is especially due to the decline in the state’s foreign exchange resources, rising foreign debt and the continuation of the central bank’s coverage of importers’ and government’s requests for foreign exchange, in addition to the repayment of external debt.
During the period from January 2011 until this October, the Egyptian pound has lost about 40% of its value against the dollar in the official market, and this percentage is even higher in the parallel market, as the dollar price on the official market is currently about EGP 8.03, against EGP 5.8 at the end of 2010.
Rebuilding foreign exchange reserves
Rebuilding foreign exchange reserves tops the challenges faced by the CBE governor during the coming period, especially after the reserve lost a large part over the past years.
According to the latest figures issued by the CBE, the foreign exchange reserves fell by the end of September to about $16.334bn, which barely covers Egypt’s imports of basic commodities for the following three months, approximately.
Controlling inflation
Although the inflation rate leaned towards declining in recent months, analysts say this may be temporary, and that inflation is likely to rise again, especially in light of the high dollar price, which exceeded EGP 8 recently. This represents another challenge for the CBE governor.
Employment of banks’ domestic liquidity
Since the 25 January Revolution, banks operating in the Egyptian market have witnessed a severe crisis in the employment of local liquidity, with the decline in loans operations and limiting investments to government debt instruments, and deposits mechanisms at the CBE, in addition to financing operations that are only partially active.
According to analysts, this crisis is one of the major challenges facing the BE and banks in the upcoming period, unless the economy becomes active again, or projects are presented to accommodate the huge liquidity at banks.
Balancing interest rates
The interest rate on the Egyptian pound is a thorny issue facing the CBE, as the CBE is always demanded to create balance between investment and public debt requirements for low interest rates on the one hand, while taking into account the social aspect of depositors and their need for high interest rates on the other. From here comes the difficulty in creating a balance between these factors, which bankers regard as another challenge facing the CBE.
The Monetary Policy Committee of the CBE has decided, in its last five meetings held this year, to fix basic interest rates, which is an indicator for the direction of interest rates in the market as a whole.
Financing the budget deficit
Banks are the largest source of finance for the budget deficit, through covering the debt instruments issued by the government every week.
Expectations of recovery of the Egyptian economy, and what this entails in terms of directing banks’ liquidity towards financing projects, rather than investing it in bills and bonds, represent another challenge for the CBE and the Egyptian banking sector.
