Only a few years ago, Egypt’s central bank had little control over monetary conditions in the Middle East’s most populous nation. High levels of bad debt in the banking sector and a lack of policy tools prevented the central bank from influencing credit growth.
In the past year, all that has begun to change, as governor Farouk El Okdah’s initiatives bear fruit. The Central Bank of Egypt (CBE) has introduced open market operations, a monthly consumer price index and a monetary policy committee that meets every six weeks, setting benchmark overnight rates and publishing its conclusions.
“It is very pleasing to see both domestic and international investors starting to analyze and try to predict the next move of the Egyptian central bank two or three weeks ahead of each monetary policy meeting. By virtue of being under scrutiny, we know that the markets are following the direction set by the committee,” El Okdah tells Emerging Markets.
He acknowledges that progress has not always kept pace with his ambitious timetable. The central bank had hoped to start full inflation targeting in 2008, but El Okdah believes it may have to wait another two to three years to allow time for improving CPI data and publishing a core inflation index.
Farouk Soussa, director of Middle East sovereign ratings at Standard & Poor’s, notes that the banking sector itself also presents a major challenge for the CBE. Intermediation remains low due to very risk-averse practices. “There is no mortgage market yet, consumer lending rates are as high as 30%, and it can take around six months to receive approval for a bank loan.”
The reason was a 2002 peak of 50 billion Egyptian pounds in non-performing loans (NPLs), of which around half were owed by state enterprises. El Okdah has advocated a robust approach to cleaning up the system.
“By the end of 2008, all the delinquencies of state-owned enterprises will be paid in cash. They have already been reduced from 26 billion pounds to eight billion,” says El Okdah.
In the private sector, given the absence of a suitable commercial court, the CBE set up its own arbitration system. This has already resolved about two-thirds of the large NPLs. For 14,000 smaller bad loans, El Okdah encouraged an amnesty programme that began in mid-2006. He hopes that more than 60% of small delinquencies will be settled by mid-2008 when the amnesty expires.
Against this backdrop, the banking sector is at last beginning to lend again. Credit could expand by 14% in 2007, compared with negative credit growth in 2005.
More generally, says Farouk Soussa, previously a Bank of England economist, a new spirit of professionalism has infused the CBE since El Okdah’s arrival. The governor has more than a decade’s experience at the Bank of New York, and has used his contacts and expertise to lure Egyptian expatriates from leading international investment banks. If he can help the CBE to lead cultural change in the banking sector, as it has already begun to lead market expectations of inflation, then El Okdah’s success will become entrenched.