The Central Bank in the saddle

The current economic difficulties have prodded the government into a flurry of lawmaking in key monetary and fiscal areas. Gamal Essam El-Din reports
Government efforts to reform monetary and fiscal policies have gained momentum in the last few weeks. The cabinet, meeting for the first time since the 21 November ministerial reshuffle, agreed to prioritise the modification of laws governing the performance of the banking sector. In addition, drafts of two key banking laws -- the Central Bank and National Investment Bank laws -- were endorsed.
The first of these is an amendment to the law governing the performance of the Central Bank of Egypt (CBE). Under the amendment, the CBE will have full independence in drawing up monetary policies and greater supervisory powers over the banking system in Egypt.
The second bill aims to alter the role of the state- owned National Investment Bank (NIB) in boosting development and fighting recession.
The cabinet's decision to amend the CBE law has been widely hailed in parliamentary circles as a progressive step in Egypt's economic history. Abdallah Tayel, chairman of the Economic Affairs Committee, told Al-Ahram Weekly that there has been a pressing need to modify the law governing the CBE since 1991, the year Egypt decided to embark on a serious economic reform programme.
"At that time the country's monetary and fiscal policies were in a shambles, but the government still kept the power to pull the strings over these policies with their own hands. This is why last week's decision is progressive, although it comes too late," commented Tayel. "The new laws allow Egypt to keep up with more modern monetary systems, which have already freed central banks from the hegemony of their Economy Ministries," he added.
The history of central banking in Egypt goes all the way back to law no. 163 of 1957, in which "it was decided that the National Bank of Egypt (NBE) should play the role of Central Bank," according to Tayel. In 1975, law no. 120 was passed to establish an independent Central Bank in Egypt. "This was a landmark step because this 26-article law gave the CBE its three prime objectives: drawing up credit and monetary policies, setting inflation and discount rates and acting as an effective watchdog institution on the entire banking system," said Tayel.
In spite of its clearly defined role, the authority of the Central Bank remained largely symbolic. In some cases -- especially while former prime minister Kamal El-Ganzouri was in office -- the CBE was completely ignored. This deplorable state of affairs in Egypt persisted while governments the world over, especially in England, America and Japan, were surrendering much power over economic policy to their central banks.
Two weeks ago, President Mubarak took the initiative of abolishing the economy ministry and gave the Central Bank a free rein. The new proposals for Egypt's banking laws will give practical effect to President Mubarak's directives in a number of ways.
According to Mahmoud Abul-Oyoun, the CBE's new and 12th governor, a first effect of the new proposals is that all basic laws dealing with banks will be grouped into one unified "Central Bank Law." Abul-Oyoun described how the proposed 114-article law will take over from three basic banking laws -- the Banking and Credit Law (no. 163 of 1957), the Law on Regulating the Handling of Foreign Exchange (no. 97 of 1976) and the Secrecy of Banking Accounts Law (no. 205 of 1990). "This merger of laws into the Central Bank Law is a necessary step, especially now that the Economy Ministry has been abolished. More importantly, it will give the CBE both de facto and codified supervision on all banking operations," said Abul-Oyoun.
The CBE's authority under the new proposals will be strengthened by the fact that the Central Bank will be entirely responsible for appointing the senior officials of its affiliated banks. "Under the present law, it is the Economy Minister who usually assumes the power to hire and fire senior banking officials. The CBE must merely be notified of the appointment decision," said Abul-Oyoun. "This will change in the new law. The power to appoint senior banking officials will be solely vested in the Central Bank," he said.
Many studies have demonstrated that stripping the CBE of absolute powers to appoint senior banking officials was to blame for the proliferation of corruption in banking circles and the worsening of the problem of bad debts in affiliated banks.
The new CBE law should also keep abreast of the latest international standards in banking operations. There are many articles in the law which clearly achieve this, said Abul-Oyoun, "the most important of which is that a banking customer will no longer be allowed to borrow more than 10 per cent out of the bank's issued capital." Under the current law, a customer's borrowing is allowed to reach 35 per cent of the bank's issued capital.
Along with the amendment of the CBE law, the amendment of the National Investment Bank (NIB) law is an equally important step in the new reform programme. While the CBE proposals are aimed at bringing discipline to monetary and credit policies, the NIB proposals are mainly targeted at fighting recession and boosting development in line with sound economic criteria. The NIB was established by law no. 119 of 1980, with the vision of it being the main financial tool in spending on the state's five-year socio- economic development plans. To achieve this objective, the NIB mainly depends on the financial resources flowing from social insurance and pension funds, the post offices' savings accounts, revenues from investment certificates and other channels. The NIB also has stakes in 30 joint-stock companies and banks, estimated to be worth LE336 million,.
On 30 June, 2001, the total financial resources at NIB's disposal stood at LE200 billion. From this amount, LE101 billion was used by the bank to fund the state's 2000/2001 development plan, according to official statistics.
When it was first established in 1980, the NIB was affiliated to the Ministry of Planning -- the ministry responsible for mapping out development plans in a centrally-planned economy. Under the new proposals, however, the NIB will instead be affiliated to the Finance Ministry, and will also be subjected to the supervision of the Central Bank.
Ahmed Abu Ismail, a former finance minister, told Al- Ahram Weekly that this new approach is primarily aimed at developing the role of the NIB over the coming period. "In its present form, the NIB is performing one of the Finance Ministry's roles but it is not subject to its supervision. Under the new law, however, the Finance Ministry will make use of NIB's financial resources in an economic -- that is to say, profit-making -- way," Abu Ismail said.
This, he explained, will necessitate separating the bank's service savings from investment savings. "The service savings are directed to funding the development plans. In the area of investment savings, however, the bank will act like a commercial bank." The NIB, said Abu Ismail, will give loans to state-owned agencies -- such as service and economic authorities (e.g. the railway authority), municipal councils and other agencies -- against a market interest rate. "It will also receive deposits as a new channel for raising its pool of savings," Abu Ismail said.
Abu Ismail said he hoped the NIB will change its practices with the new reforms. "I urge the NIB to no longer fund development plans in a haphazard way because in many cases the way the bank's funds were directed towards development proved to be a fiasco," he said. The former finance minister cited the agricultural project of El- Salhiya on the Nile delta as a particularly bad example of this. "For many years, this project represented a drain on the bank's financial resources, so much so that it had to borrow from commercial banks against 14 per cent interest rate." This exerted pressure on cash liquidity in banks and finally contributed to the three-year recession and financial squeeze, argued Abu Ismail.
Abu Ismail expressed high hopes that placing NIB under the Finance Ministry's purview will realise the required balance between NIB's revenues and expenditures and effectively contribute to fighting recession and finally inducing trust in the state's economy.
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