RIYADH: Stabilizing the price of the Egyptian pound is not a goal for the North African country, an advisor to the Governor of the Central Bank of Egypt has claimed while speaking on the sidelines of the International Monetary Fund and World Bank meetings.
Hisham Ezz Al-Arab, who is also CEO of HE Advisory, suggested Egypt should instead be focusing on generating revenue to cover its debts.
He said that Egypt's debt represents 80 percent of the country’s gross domestic product, which is a low percentage compared to the global level, where the world's debt represents 3 times the GDP.
Egypt’s currency was pegged to the dollar until 2016, and Ezz Al-Arab warned that every 10 percent increase in the dollar's exchange rate against the pound translates to a 4 percent rise in inflation in Egypt, while the dollar's 10 percent decline against the pound reduces inflation by 0.5 percent.
The consumer price inflation in Egyptian cities rose to 15 percent on an annual basis in September, compared to 14.6 percent in the previous month — the highest rate since November 2018, when it reached 15.7 percent.
Reflecting on the central bank’s attempts to get a grip on inflation, Ezz Al-Arab told Al Arabiya: “One of the things that changed in the way the CBE looks at the currency price is that stabilizing the currency rate is not a goal; currency rate, reserve size or interest rate are tools and not goals.”
He added: “As soon as you think of it as goals, you lose the basic one which is price stability.”
Ezz Al-Arab went on to argue that the most important question facing the country’s central bank is: “Do we have the ability to generate revenue that will cover this debt?”
“In my personal opinion, in Egypt we always look at the obligations of the state and not at the assets; in any balance sheet, you should look at liabilities and assets, not liabilities and cash flow,” he explained.
Egypt owns many assets and is a rich country, and there is no fear of default, the advisor said.
Ezz Al-Arab also stressed that the optimal use of the government's assets will contribute to improving the level of debt and changing the future outlook for Egypt.
On monetary policy, Ezz Al-Arab said that the decision-maker has tools that can be used, including the decision of the CBE to raise the mandatory reserve ratio for banks as one of the means of withdrawing liquidity from the markets.
He added that the decision to raise interest rates in Egypt differs in its impact compared to other economies.
He explained that raising interest increases the debt service burdens on the Ministry of Finance and leads to a slowdown in the economy, while inflation is not coming from the demand side but from other reasons, including an increase in money supply, and therefore the decision to raise the mandatory reserve ratio was a right one, to reduce liquidity.
The local currency has lost about a quarter of its value against the dollar this year, due to a combination of local economic pressures, global economic repercussions from the Russian-Ukrainian war, and the dollar's appreciation against almost all major global currencies.
The CBE, during an extraordinary meeting on March 19, decided to devalue the pound by 15.9 percent, and the pound has continued to decline gradually since then.
