The appointment of Farouk El-Okdah as the new governor of the Central Bank of Egypt has been met with cautious optimism. Yasser Sobhi reports Markets showed indifference to the appointment of Farouk El-Okdah to the thorny position of Governor of the Central Bank of Egypt (CBE). Stock prices dropped slightly in the Cairo Stock Exchange, accompanied by an average level of trade volume. Even the rate of the dollar against the Egyptian pound retained its level on the black market at around LE7 to the dollar. "Of course prices did not fall because of the change in the leadership of the central bank," said Hussein Choucri, chairman of HC securities. "The event was already priced into the stocks as the decision was expected. Moreover, El-Okdah has a good reputation and is well respected, but investors need to see action and will wait for decisions, especially in resolving the exchange rate issue." Indeed, El-Okdah, 57, has acquired a favourable reputation during his 11 months as chairman for the National Bank of Egypt (NBE), the largest bank in Egypt. Banking sources said that he quietly succeeded in resolving a large portion of the bad debts at the NBE. His international experience adds to his credits, and he has a PhD from Wharton University in the United States. He worked for the Bank of New York from 1989 until 2002 as vice president for Syndicated Loans and then as consultant for the Bank for Credit and Finance in the Middle East and Asia. People close to El-Okdah describe him as discreet, self-confident, well-organised, and efficient -- qualities that will be needed in his new job. Meanwhile, his strong personality does not suggest he will become a silent follower to government intentions. Indeed, he is expected to uphold the independence given to the CBE in the new law, but also continue the well-defined coordination between the CBE and the government in setting monetary policy targets through the establishment of the Coordinating Council for Monetary Policy. His good relations with the government, especially Prime Minister Atef Ebeid, will only help to make the coordination proceed more smoothly. Indeed, banking sources say, it was his turbulent relationship with Ebeid that did away with El-Okdah's predecessor, Mahmoud Abul-Oyoun. During the last five months, Abul-Oyoun was reported to be locked in a struggle with the government and members of the NDP over the independence of the CBE and a host of other controversial issues, including the exchange rate policy. Ebeid, it is rumoured, retaliated by delaying the appointment of the cabinet's representative in the CBE board, rendering it inactive. Abul-Oyoun spent the last five months without a CBE board and therefore many decisions were delayed. The tenure of the CBE governor is four years, and by law, he can only be removed by presidential decree. A challenging agenda awaits El-Okdah. He has to deal with two major problems facing the economy: the foreign exchange market and banking sector reform. Indeed, the CBE plays a dual role in the economy, both monitoring the activities and performance of 62 banks and designing monetary policy by using its instruments to control the liquidity in the market, and hence the inflation rate and economic growth. There are also several delayed actions that are now expected to be taken. The primary dealers system in the government bonds -- aimed at activating the bonds market and improving the management of the public debt -- has been finalised by the Ministry of Finance and is waiting for implementation regulations to be defined by the CBE. Also, the Interbank system in foreign currency, considered to be an important component of the free exchange rate system, is awaiting CBE implementation regulations. Nevertheless, what people are really waiting for is a single market for foreign currencies. "The free exchange rate system was announced at the beginning of the year, but has not yet been implemented," said Mahmoud Mohieddin, the newly appointed CBE board member and chairman of the economic committee in the National Democratic Party. "It is still more a managed float system rather than a full liberalisation." In order for the system to succeed, Mohieddin said, the government should allow the players in the market to determine the exchange rate freely, without administrative intervention. The government also needs to define and develop the market by introducing the Interbank system, and to have a clear monetary policy, coordinated with the fiscal policy, which gives good signals to the market. "We will need also to apply a restrictive monetary policy, by increasing interest rates in the short term from its current level, until the exchange market regains its stability," Mohieddin added. Those are probably the measures to be taken in the near future. Of these, only the interest rates policy is highly debatable. A banking source pointed out that it is unlikely that El- Okdah will encourage this policy. "He is coming from a bank leadership position and he knows that banks suffer from high cost of funds and cannot support another increase in interest rates," the source said. However, the most important reforms may take place in the CBE itself, which needs to undergo restructuring to fulfil its supervisory role and be able to manage the monetary policy. Reforms include developing a modernised and sophisticated analysis department. Experts say that information and good analytical research are indispensable for a new active monetary policy of the CBE, an institution designed by law to target inflation and intervene discretely in the market. Furthermore, there is a need to upgrade the bank's incentive system to attract new clients.
