Oxford Analytica's (OA) 2006 Report on Monetary Policy Transparency in Egypt, ranked Egypt's overall compliance with this standard as "Intent Declared." Egypt continues to make gradual progress in improving monetary policy transparency. One important step in this regard was Egypt's 2005 subscription to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS). However, there remain deficiencies in Egypt's reporting of certain monetary data, particularly with regard to timeliness and periodicity. Egypt remains committed to reform; restructuring and consolidation within the banking sector; and improvements in the CBE's structural and staffing resources. The CBE's recently constituted Monetary Policy Committee (MPC) is developing an inflation-targeting framework that it hopes to have in place by late 2007. One early contribution of the MPC to enhanced monetary policy transparency has been the introduction, in 2005, of its Monetary Policy Statement, in which policy objectives, the framework and instruments used, and the decision-making process are explained to the public. This statement and subsequent amendments appears on the CBE website, where the public has access as well to the CBE's major monetary-policy publications, its annual reports, and a variety of other relevant information. In the future, possibly at the implementation of the medium-term inflation targeting framework, the MPC plans to release the minutes of its meetings and its voting records.

General Overview

The 2006 Oxford Analytica report on Monetary Policy Transparency for Egypt rates the country's overall compliance as "Intent Declared." According to this report, the Central Bank of Egypt (CBE) deserves credit for its ongoing commitment to transparency and independence. At present, there remain deficiencies in the CBE's capacity for inflation forecasting, but there is a recruitment and training program underway that is intended to address this issue. Explicit inflation targeting will be introduced in late 2007, according to the OA report. Also noteworthy is the 2005 creation of the Monetary Policy Unit (MPU) within the CBE. At present, the MPU issues press releases following its meetings, but these have limited detail. The 2006 OA report notes, however, that the actual minutes of such meetings, as well as details on MPU votes, will be published by the CBE as soon as explicit inflation targeting has been achieved. Developments in the banking sector are also expected to improve transparency, with the successful privatization of one of the four previously state-owned banks (in 2006) and as plans for the merger of two other publicly held banks go forward.

The IMF's 2006 Article IV Consultation reported that Egypt continues to move toward a true market economy, particularly through privatization and restructuring of state-owned banks. According to the report, "the authorities continue to strengthen monetary policy operations" and that "the CBE's current monetary policy stance is broadly neutral" (p. 3). CBE authorities told the IMF staff that its monetary policy was geared toward stabilizing inflation, but that it was prepared to change tactics toward a tighter policy if circumstances (e.g., increased inflationary pressure) so indicate.

The IMF also notes that the CBE's operational authority and policy-making capabilities should be enhanced. The CBE has been successful in maintaining currency stability against the U.S. dollar, according to the IMF staff. The report does suggest that "there is scope to enhance the role of market forces in determining the exchange rate" (p. 3), but also recognizes that the CBE has the option to rely upon the effects of privatization on the exchange rate for a time, while waiting for productivity gains occasioned by its reform programs to kick in.

The 2006 IMF report also cited with approval the CBE's ongoing modernization efforts with regard to monetary policy, including the ongoing plans to employ medium-term inflation targeting, which is set to begin in late 2007 or early 2008. According to the report, "in this context, the CBE has established a corridor for the inter-bank overnight rate and significantly enhanced communications with the publication of a monetary policy statement and releases following regular MPC meetings" (p. 14). The CBE's efforts to improve its formal capacity for macroeconomic analysis and forecasting capacity also met with IMF staff approval. According to the 2006 IMF report, "the CBE has consequently adopted a monetary policy framework relying on broad indicative guidance from monetary aggregates and various inflation measures in the context of a managed float" (p. 15)

The 2006 IMF Consultations also found that "the inter-bank foreign exchange market is operating smoothly and market participants expressed satisfaction with its efficient functioning" (p. 15). Recent CBE policy has permitted the central bank to keep the exchange rate between the Egyptian pound and the U.S. dollar stable during the period of 2005-2006. This seems to indicate an implicit peg to the dollar, but Egyptian authorities maintained to the IMF staff that they are committed to the policy of a managed float. CBE authorities raised a number of concerns with the IMF staff, including a dampening of the Egyptian currency's competitiveness on foreign exchange markets should nominal appreciation occur. They argued that certain sectors, including tourism and non-oil exports, needed support. Whereas the significant overvaluation of the Egyptian pound that was evident in 2000 may have been offset by depreciation occurring during the period 2001-2004, the IMF notes that a full analysis of Egypt's current competitiveness is hindered by the disruptive effects of certain ongoing reforms and the weaknesses apparent in the available data.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

ID

The 2006 OA report on Monetary Policy Transparency rated Egypt's compliance with this principle as "Intent Declared." The Law on the Central Bank, Banking Sector, and Monetary System (No. 88, 2003, hereafter The Banking Law) provides the legal basis for the CBE's organization and procedures, including its obligations with regard to disclosure and transparency. The law directly addresses seven areas of the CBE: its role, the overall structure of the banking system, management procedures as they apply to state-held banks, bank-account confidentiality, mortgage procedures, currency issuance and foreign exchange, and sanction procedures. The law specifically grants to the CBE the authority to issue currency, formulate monetary policy (including policies relating to credit and the banking system in general), manage national gold and foreign exchange reserves, and manage public debt. In addition, the CBE is authorized to serve as the oversight agency for the implementation of monetary policy and performs in an advisory capacity to the national government regarding credit issues.

According to the 2006 OA report, the CBE's autonomy became an issue in 2002, when President Mubarak assumed direct authority over the bank, including the right to appoint the CBE governor and all members of the bank's board of directors, and the right to unilaterally overrule CBE decisions in the case of national emergency. While the 2003 Banking Law formalizes the president's right of direct authority, including the national emergency provision, it does not contain provisions officially according to him the rights of appointment. With the president's assumption of authority, the prime minister is no longer authorized to involve himself in the CBE's affairs. The 2006 OA report notes that "the cabinet appointed in 2004 has shown far more interest in coordination between fiscal and monetary policies" and "the current governor of the bank has already achieved improvements in management and transparency" (p. 113). Nonetheless, the OA report suggests that a further strengthening of CBE autonomy would be desirable.

The creation of the CBE's Monetary Policy Unit in 2005 was intended to improve public confidence in the process. To achieve this end, the unit has striven to recruit credentialed staff and, according to the 2006 OA report, "now employs a number of highly qualified individuals who have undergone substantial training in forecasting." The report adds that "Bank of England courses are also now available to CBE staff, and the CBE has also set up a number of new departments for forecasting and analysis" (p. 113). Pay increases have also been used as a way to attract and retain qualified staff.

Although there is no legislative definition of the relationship between the CBE's monetary policy and the government's fiscal activities, some distance was put between the two in 2006, when the National Investment Bank was restructured to become a development bank. This means that the CBE can no longer provide indirect loans to the government through that agency, but, according to the 2006 OA report, it can still, conditionally, offer direct loans. The Banking Law places a cap on such loans and dictates the a maximum 3-month term, with limited opportunities for granting extensions. As noted by the 2006 OA report, "these loans are reported in the CBE's Monthly Statistical Bulletin" (p. 114).

The Banking Law entitles the CBE to trade in government securities on the open market. According to the 2006 OA report, the CBE has computerized its trade in government debt, and also serves as primary dealer of T-bills. Regarding foreign-exchange activities, the OA report notes that "the CBE uses foreign exchange transactions only to cover its requirements and does not take positions" (p. 114) and goes on to state that the central bank's participation in currency markets was reduced by the creation of a foreign exchange inter-bank market in 2004. The Banking Law requires that the CBE transfer to the treasury all net profits in excess of those required to maintain legally established reserves and certain other legally specified deductions.

According to the Constitution, the CBE is the government's banker, in which role, according to the 2006 OA report, it must bear the responsibility of managing "debt, credits and investments obtained by the government and other public entities from foreign banks and international organizations" (p. 114). This responsibility does not obviate the CBE's independence under the law, however.

In addition to the roles already discussed, the Banking Law confers upon the CBE the role of oversight and regulation of the banking system as a whole. To this end, the 2006 OA report notes that in 2004 "a Banking Reform Unit within the CBE [was] given the responsibility to restructure the banking sector to make it more robust and competitive" (p. 114). The units efforts have been aimed at restructuring, consolidation, and privatization programs, deal with the problem of non-performing loans, and otherwise improve the supervision of Egypt's banks. Significant success has already been achieved, according to the OA report, but the planned merger of two state-owned banks has stalled due to issues arising from nonperforming loans.

Open process for formulating and reporting monetary policy decisions.

EN

The 2006 OA report on Monetary Transparency in Egypt rates the country's compliance with this principle as "Enacted." The CBE is established by the Egyptian Constitution as the independent authority charged with the formulation and implementation of monetary policy. The structure of the CBE and the constitution of its executive members is governed by the Banking Law of 2003. By law, the president appoints the CBE governor and his two deputies. As noted in the 2006 OA report, "the CBE Board is made up of the head of the Capital Market Authority; three members representing the ministries of finance, investment, and foreign trade and industry; and eight experienced persons specialized in monetary, financial, banking, legal and economic affairs" (p. 116). The law requires the CBE board to meet twice monthly, and that meetings can either be called by the governor or convened at the request of two-thirds of the board's members. The governor must attend such meetings, or send at least one of his deputies in his stead. The CBE board's decision-making process requires a majority vote. According to the 2006 OA report, the MPC meeting schedule is once every six weeks. Dates of these meetings are published in advance on the CBE website.

The law confers upon the CBE the independence to select its monetary instruments and set policy targets. According to the 2006 OA report, the CBE changed the way it handled the inter-bank overnight deposit and lending rates that is aimed at reducing volatility. In the words of the OA report, the new practice "involves a corridor system... within which the overnight rate can fluctuate" (p. 116). The use of CBE notes has been replaced by Certificates of Deposit since 2005, when CD's were exempted from taxes. The OA adds that the CBE continues to use open-market operations to manage liquidity. Information regarding the CBE's monetary instruments is published on the CBE website.

The 2006 OA report notes that interest rate changes are announced on the CBE website, but are not explained in detail. MPC minutes and voting records are not yet made public, but are expected in the near future, with the adoption of explicit inflation targeting, currently set to occur in the 2007-2008 fiscal year. In addition, the 2006 OA report notes that Egypt's official statistical agency, the Central Agency for Public Mobilization and Statistics (CAPMAS), currently makes available a wholesale price index, but has not yet produced a reliable consumer price index. Overall, the OA report states that CBE credibility has improved.

The CBE website lists the bank's main publications as the Monthly Statistical Bulletin, the quarterly Economic Review, the External Position Quarterly Report, and the Annual Report, all of which are available in electronic form. Statistical coverage on the website includes daily and bi-weekly inter-bank rates, monthly inter-bank averages, liquidity data, the CBE discount rate, balance of payments data (quarterly), and data on T-bills and CDs. The MPC's monthly statement of policy is also available on the website. According to the OA 2006 report, the CBE makes a report to the MPC every six weeks regarding inflation and prices, but this information is not yet broadly disseminated. The CBE website also disseminates the text of the governor's press conferences and the CBE's press releases.

Public hearings in parliament on the CBE's financial statements are required by the Banking Law (the statements must also be made available to the president). The statements must be prepared no later than 90 days after the close of the fiscal year in question, and must be submitted to external audit. The law also requires an annual report of the CBE's financial position and activities for the prior year, reviewing all aspects of monetary and other policies. According to the 2006 OA report, the CBE also submits quarterly activity statements to both the president and parliament. The legislatively mandated due date for submission of financial statements, controllers' report, and annual report to the president is within 10 days of approval by the CBE board, with simultaneous submission to parliament and the prime minister.

The 2003 Banking Law also governs the CBE's oversight of the broader banking system. The law confers upon the CBE the right of on-demand access to bank records, which must be brought to the CBE for its scrutiny. The 2006 OA report notes, however, that "local banks are reluctant to disclose information beyond what is supplied in their annual reports or to provide income statements" (p. 117). The OA also notes that ongoing reforms in the banking sector and the bank privatization program has led to an enhanced capacity to enforce compliance with reporting requirements. Problems encountered in the efforts to effect a merger between two state-owned banks have been addressed by a program of comprehensive internal audits, according to the OA report. Finally, the OA report advises that the state bank database recently compiled by the CBE remains unavailable to the public.

Public availability of information on monetary policy.

EN

The 2006 OA Fiscal Transparency report rated Egypt's compliance with this standard as "Enacted." The IMF's SDDS website notes that Egypt subscribed to the standard in 2005 and posts its data on the SDDS bulletin board with regular updates. The OA report, however, notes that the quality and timeliness of Egypt's monetary data could be improved. Egypt adopted the IMF's Special Data Dissemination Standard (SDDS) in January 2005. According to the OA report, the CBE makes monthly data available on a variety of subjects, including reserve money, net domestic claims on the public sector, net external position, and net international reserves (p. 119), and it offers daily inter-bank data as well as interest rate information, which is posted weekly on the CBE website. Regarding the material available on the CBE website, the 2006 OA report noted that "while information on monetary policy formulation is improving, the nominal level of data release by the CBE is still compromised by the comparatively inferior data quality and dissemination standards provided to it from other financial bodies in Egypt. Independent users of data published by government ministries still treat official data with caution" (p. 119).

CBE publications include the Official Journal, Monthly Statistical Bulletin, and Quarterly Economic Review, the latter two not yet being available in electronic form on the website. The Journal offers weekly statement of the CBE's financial position, whereas the Monthly Statistical Bulletin provides balance sheet summaries (these also appear in the Quarterly Economic Review). The OA report notes that the Monthly Statistical Bulletin provides data on reserve money, counterpart assets, domestic liquidity, deposits, domestic credits, and foreign assets and liabilities and goes on to add that "an overall balance sheet with aggregate transaction data is published in the CBE's Annual Report" (p. 119).

In its legal requirement to serve as the government's lender of last resort, the CBE has been inactive since 2002, but the Banking Law does require that it make emergency funds available to troubled banks at risk of failure. Current and ongoing changes in the banking regime, including the raising of the minimum capital requirements five-fold, to 500 million Egyptian pounds, are aimed at making this possibility less likely, according to the 2006 OA report.

The CBE website is the primary venue by which monetary policy information is disseminated to the public, in the form of publications, articles, statistical data, press releases, and occasional statements by the governor of the bank. The website also offers information regarding the banking sector as a whole and other data of interest to business and investors. Many of the website publications are also available in printed form on submission of a written request to the CBE. According to the 2006 OA report, "additional economic information, some of it pertaining to monetary issues, is available in the Egyptian Economic

Bulletin (EEB), published by the Cabinet Information and Decision Support Center" (p. 120).

Accountability and assurances of integrity by the central bank.

EN

The 2006 OA Fiscal Transparency report for Egypt rated the country's compliance with this standard as "Enacted." Article 28 of the Banking Law requires the CBE governor to render quarterly reports on foreign debt and monetary, credit, and banking activities. The CBE board must also present an annual report on monetary policies and credit, as well as its own financial statements, including profit-and-loss statements and a balance sheet, to the president, prime minister, and parliament. In addition the governor consults with ministries when CBE input is required regarding the economy. Prior to submission for presidential and parliamentary review, the financial statements are subject to internal audit, but according to the 2006 OA report, the audit procedures are not made available to the public. In addition, the OA report notes that "there is still no public statement on the basis or details of such meetings, or requirements for explaining policy objectives and describing performance in achieving them" (p. 121).

The CBE annual accounts are subject to external audit, according to the 2006 OA report. External auditors are appointed by the Central Auditing Organization (CAO). Audits are conducted according to standards that are modeled upon internationally recognized standards. An internal code of conduct governs the official activities of CBE officials. According to the 2006 OA report, "CBE employees share the same protections as all public sector employees under national employment law" (p. 121).