Hopes pinned on Egypt’s new Central Bank chief
Egyptians just completed elections for their first parliament since 2012, but turnout rates of about 26% signalled the waning popularity of Egypt’s President Abdel Fattah al-Sisi. While his stance on security issues has been strong, the economy is plagued with problems ranging from fuel shortages to unchecked government expenditure.
On the monetary side, however, a recent change in leadership has been received favourably by investors. Departed Central Bank of Egypt (CBE) governor Hisham Ramez made few friends in economic circles because he sold foreign exchange reserves to support the local currency. Facing increasing pressure, Ramez resigned in October.
Enter new CBE Governor Tarek Amer, who many investors hope will enact policy changes that will put Egypt’s monetary trajectory on the right track. In a world with limited monetary policy options, Amer’s most powerful tool will be providing policy certainty.
In fairness to Ramez, he inherited leadership of the CBE when foreign currency reserves were already at a low of $13.6 billion. Ramez was trapped between protecting investor confidence by propping up the value of the Egyptian pound and maintaining Egypt’s ability to buy goods from overseas.
In December 2010, on the eve of the Egyptian uprising, foreign currency was a healthy $36 billion. Within the year, this had halved as the CBE burned through reserves to project an image of monetary stability as the economy collapsed. What Ramez inherited when he took the job in February 2013 was a level of foreign reserves dangerously close to the three-month import cover level — the minimum threshold recommended by the International Monetary Fund that allows a country to keep importing goods.
Ramez implemented a policy of managed devaluation, which saw the pound drop during his tenure from 6.7 to the dollar to 7.9 to the dollar. However, foreign reserves still suffered, rising $2.7 billion under his watch despite more than $40 billion of injections from Egypt’s friends in the Gulf through loans and grants as well as a Eurobond sale.
Determined to eliminate the foreign exchange black market, Ramez put daily caps on dollar deposits of $10,000 and monthly caps of $50,000 — a move that frustrated legitimate trading businesses. Opposite to the intended effect, the limits drove people away from banks.
While economics dictates that a weakening currency is good for exporters and bad for importers, because it costs more local currency to buy goods, importers have also suffered from a propped up local currency because there have not been enough dollars to buy foreign goods. As the economy was starved of dollars, strategic commodities such as wheat and energy were favoured at the expense of other business. In addition, a falling pound means rising inflation, as it takes more local currency to buy the same amount of goods and services.
When Ramez left office, the currency was weaker and neither inflation nor the foreign reserves situation were much better.
Gamal Negm has been acting as caretaker governor since Ramez resigned. While the market expected further depreciation of the Egyptian pound, the CBE acted to boost the currency on November 11th. “The appreciation effectively neutralised October’s devaluation round, which did not do much to ease foreign exchange shortages,” according to brokerage firm EFG Hermes. This was largely another attempt to boost public confidence in the pound.
This is the perfect example of what many bankers saw as the whims of Ramez’s currency policies, which added uncertainty to the market. Investors are eager to see predictability in currency policy, even if it means further devaluation and higher inflation.
While Amer brings new blood, he is no stranger to the workings of the Central Bank. He served alongside Ramez under governor Farouk el-Okdah and was deputy governor under Ramez. Amer has also held senior positions at Bank of America and Citibank and headed the state-owned National Bank of Egypt.
Amer is seen to be more open to collaboration with bankers, who believe they will see a move from reactive to proactive policies under his tenure. His test will be to bring fresh ideas, such as pegging the pound to a basket of currencies rather than only the US dollar.
But Amer alone cannot solve Egypt’s economic woes. A coordinated approach is needed that looks beyond monetary policy in isolation. For example, the biggest sources of foreign reserves are foreign investment, tourism and remittances. Policies that target these will give Amer more flexibility. Knowing the difficulties in tackling these issues and the limited monetary policy options available, investors would be wise to temper their expectations.