The new draft banking law will not compromise the Central Bank of Egypt's autonomy argues Sherif Delawer* in this response to comments by CBE board member, Mahmoud Fahmy, expressed in an Al-Ahram Weekly interview In his Al-Ahram Weekly interview last week, Mahmoud Fahmy's main criticism of the draft "Law of the Central Bank of Egypt, the Banking Sector and Foreign Currency" focused on undermining the independence of the central bank. At the outset, it is important to define what is meant by independence in the context of a central bank. Independence implies the separation of monetary policy, designed and implemented by the central bank, from macro-economic policies adopted by the government. Thus, to avoid confusion over the concept of independence, the role of central banks in general must be clarified. Monetary policy involves varying the price and availability of money and influencing the exchange rate in order to control the value of money (the inflation rate) and the volume of economic activity (GDP in real terms). The main instrument of monetary policy is the short term interest rate (which is the rate at which banks lend to one another for three months). A central bank closely monitors the movement of funds between government and the business sector. If, at any particular point, more funds are moving from banks to the government's coffers (for example, because bank customers are paying their taxes or purchasing new issues of treasury bills) then the market will be short of funds. If the balance of flows goes the other way (because the government is paying its bills) then the market will have excess funds. Thus, a central bank's day- to-day objective is to avoid sharp fluctuations in interest rates that would arise if market shortages or surpluses were not relieved. It is important to note that a central bank's transactions to the market are at rates of its own choosing. However, if the government (the Treasury after consulting the central bank) decides that a change in short term interest rates is appropriate, the central bank would change the rates at which it relieves the shortage or surplus. Such a change would normally be reflected quickly in the base rates set by banks, for loans to their own customers. A central bank can also attempt to influence the exchange rate through direct market intervention using the country's foreign exchange reserves (these are owned by the Treasury and managed by the Central Bank on the Treasury's behalf). As well as acting as the government's banker, a central bank acts on the government's behalf when raising loans in the market (the issuance of Treasury Bills at a discount for payment, usually in three or six months, is mainly directed at managing the liquidity of the money market). It is hoped that this elaboration of the central bank's role illustrates the depth of its relationship with the government. Although monetary policy is handled by the central bank, its influence extends to the growth of savings rates in banks and the exchange rate, which directly affect the economic performance of the government. In Egypt, the government is constitutionally accountable to the People's Assembly. We must, therefore, look at a central bank's independence from this perspective (which is in sharp contrast to the independence of the judicial or legislative authority from the executive). The central bank is primarily one of the arms of the executive. It is only independent insofar as it acts autonomously of the cabinet of ministers. However, it must act in accordance with the economic policies of the government and, as such, is required to manage monetary policy in coordination with the government. This is the purpose of the coordination council mentioned in the draft law. Confusion over the role of the central bank probably has a lot to do with the fact that we sometimes use autonomy and independence interchangeably in the Arabic language. Besides, this independence is a means and not an end in itself. It is normal that the rights and responsibilities of a central bank vary from country to country: the legal rights awarded to the central bank to outline its goals; how its policy instruments are utilised; its authority to appoint and remove governors and members of its board; whom the governor is accountable and reports to; and who owns it, vary from country to country. For example, the rights enjoyed by the central banks of New Zealand and Australia are higher than in France and Spain. While the central banks of the UK and Canada are wholly state owned, countries such as Austria, Mexico, Turkey and Japan, have joint ownership between the state and important players in the banking sector. Some states do not even own a single share in their central bank, such as Switzerland and the USA. Thus, there is a great deal of variety in central bank prerogatives among various countries, according to their economic, historical and constitutional development, which makes it impossible to apply or import one model without taking local conditions into consideration. All of these factors were taken into consideration by the Higher Policies Council and the Economic Committee of the National Democratic Party when examining the draft law. The Governor of the Central Bank of Egypt (CBE) as well as the chairmen of leading banks, legal, economic and financial experts also participated. The draft law encompasses the following principles: To apply the concept of autonomy employed in most developing and economically advanced countries, which is based on consultation and coordination between the government and central bank in setting monetary policy. It remains up to the CBE to select the direct and indirect instruments and means by which monetary policy is managed. Therefore, it is important to create a coordination council, which hosts ministers concerned with economic affairs, the CBE and experts in order to guarantee the harmony of monetary, credit and banking policies (executed by the bank) with the state's general economic policies. This sets a clear basis for the relationship between the Government and the CBE in order to avoid contradictory policies. The draft law also emphasises the autonomy of the personnel, administrative and financial hierarchy of the CBE. The Bank is a public entity, directly under the president of the republic, making it necessary for the CBE to be transparent in its activities and making it subject to legislative monitoring. The law also hopes to activate the CBE in terms of the assessment, supervision and monitoring of banks. This would be conducted in accordance with international standards and the Basle resolutions regarding the monitoring of banking, adopted in April 1997. It envisages setting limits for investment, credit allocations and debt limits for each client, allowing the governor of the CBE the right to initiate investigations and raise charges in cases where the law has been violated, out of concern for the stability of the banking sector. To conclude, I would like to emphasise that some of the reservations expressed by Mahmoud Fahmy on some parts of the text have already been amended and that the draft law will be reviewed by the Legislative Committee of the State Council. Perhaps the version Counsellor Fahmy commented on was not updated. In addition, it is expected that discussions between the Parliamentary Committee of the National Democratic Party, the Shura Council and the People's Assembly will raise several suggestions, eventually leading to the drafting of the new law in a way which serves the national economic interest better. * Sherif Delawer is a member of the Higher Policies Committee of the National Democratic Party.
