Despite government promises, a mechanism that could help solve Egypt's forex market problems has failed to materialise. Yasser Sobhi investigates Lending between banks in foreign currency, known as the interbank in dollars, has once again been postponed indefinitely as monetary authorities have yet to issue the necessary implementing regulations. The interbank market allows banks to better manage their liquidity in foreign currencies. Early last month the government announced that the new mechanism would be implemented shortly, but there have been no official statements explaining the delay. The Central Bank of Egypt (CBE) did not respond to the queries of Al- Ahram Weekly on the matter. These dollar loans between banks on the local market are considered by many to be an important component for the success of a free exchange rate regime, adopted last January. "The interbank in dollars will ensure a better functioning of the foreign exchange market in Egypt. But Egyptian banks are still not making enough effort to activate the mechanism," says George Abed, director of the Middle East and North Africa Department at the International Monetary Fund. "They also are not doing enough to attract foreign currencies into the formal system." However, the lack of enthusiasm from banks towards the interbank mechanism in dollar may be justified. Since most banks operating in the local market suffer from a shortage in liquidity in foreign currencies, experts do not expect heavy trade in the new interbank market. "There is no surplus of foreign currency in banks," says Jerome Guirand, CEO of the National Societe General Bank of Egypt. "We're not speculating or trying to make money from the currency exchange rate. When we receive foreign currencies, we sell them immediately to our clients. It is not our business to sell foreign currency, and the profits from our traditional activities are much more important." The interbank market deals with liquidity problems -- a bank in a surplus position could lend to another bank that suffers from a shortage. Transactions are in the short term, usually for one day, three days or one week. Banks tend to borrow from their counterparts to fulfil either the minimum reserve requirements of the Central Bank of Egypt (CBE) or immediate obligations. Nevertheless, banks are witnessing an increase in foreign currency deposits from 20 per cent of the total deposits in 1999 to 28 per cent at the end of June 2003, while loans in foreign currency fell from 23 per cent to 20 per cent in the same period. However, as a Fitch Rating report on Egyptian banks says, "While these ratios can be regarded as positive liquidity indicators, actual liquidity may be lower." The report refers to a "rising proportion of problem loans in recent years as a result of a client's inability to service their foreign currency commitments". In addition, banks are not completely free to use foreign currency deposits as they represent liabilities that must be returned to depositors when asked, and hence should be used in a timely matching investment. Thus, lack of liquidity of foreign currency in banks is not encouraging them to push for the new mechanism. Furthermore, banks are more concerned about other major problems they are facing, such as profitability, non- performing loans, capitalisation, internal restructuring and economic growth. Nevertheless, the notion of an interbank market is not new in Egypt, as there is already an active market in local currency. The most active banks have excess liquidity in Egyptian pounds. Banks are receiving more deposits and becoming more reluctant to lend. This situation occurred as increasing public and judicial scrutiny on bank performance, due to a recent history of bad loans, has made credit employees conservative. Furthermore, the borrowers themselves tend to expand their activities less in an economy that has suffered from a slowdown for more than four years. With increasing Egyptian pound liquidity in the market, the interbank overnight rates fell from around 15 per cent in February to 5.56 per cent last week. The amount of total money traded in the local currency interbank market did not exceed four to five billion pounds, banking sources estimate. "Introducing the dollar interbank mechanism would be helpful but it is not the best initial treatment for the foreign currency market problems," says Wagdy Rabbat, chairman and CEO of Misr Exterior Bank. "The main solution is to adopt clear and comprehensive economic and monetary policies in order to regain the confidence in the economy that lead to higher growth rates." Rabbat believes that a return of confidence is indispensable to quell the unusually high demand for foreign currencies and to encourage people to sell off their dollars. However, the interbank law is still inexplicably waiting for implementation. For one thing, the formation of the board of directors of the CBE is still incomplete. The new banking law, approved last July, decreed that a new coordinating council be formed of members of the government, the CBE and independent experts, to be responsible for designing targets and overseeing monetary policy. Still, neither the new council nor the government representatives in the CBE board have yet been appointed. Rumours are spreading that differences between the government and CBE Governor Mahmoud Abul-Oyoun over sovereignty issues are delaying the government decision, with speculation that Abul-Oyoun himself will soon be replaced, as his mandate has ended with the introduction of the new banking law. Experts say the absence of a complete administrative structure in the CBE and the coordinating council for monetary policy are crippling monetary policy decision making. Monetary policy issues such as the interbank in dollar remain ambiguous. "There is a lack of a clear monetary policy," says the IMF's Abed. "Issues like liquidity management in the economy, mainly the policies of interest rates, are confusing even for bank employees themselves. It is not only the responsibility of the CBE, but the government in general."
