Cablegate: Goe Monetary Policy Coordinating Council Holds

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


This message is Sensitive but Unclassified, please handle
accordingly. Not for Internet distribution.

1. (U) The Monetary Policy Coordinating Council of the
Central Bank of Egypt (CBE) held its first meeting on April
10, 2005. The Council discussed a work plan to maintain
price stability and increase economic growth rates. It also
reviewed monetary, financial and economic developments in
Egypt and abroad.

2. (U) Following the meeting, the Cabinet spokesman stated
that the Council had agreed on four points:

- The CBE's independence in formulating and implementing
monetary policy and the Council's full support for the CBE's
inflation targeting policy, which is aimed at ensuring price
stability and increased real economic growth rates.

- The Council's full support for the CBE's foreign exchange
policies, which are aimed at stabilization of the foreign
exchange market and exchange rates and elimination of the
parallel market.

- The periodic issuance by the CBE of a detailed monetary
policy statement, in accordance with the Bank's rules of
transparency and disclosure, beginning in May 2005.

- The next meeting of the Council, which will take place in
July 2005 and will review monetary and financial policy and
economic developments.

3. (SBU) Comment: Although the Council issued a statement
affirming CBE's independence in determining monetary policy,
many observers point to the existence of the Council itself
as evidence to the contrary. The main concern is the
possibility of government interference, particularly from the
Ministry of Finance, in the CBE's setting of interest rates.
Observers point to the timing of the Council's first meeting
as an indication that this is the Council's real purpose.
Although the Council was mandated in Banking Law No. 88 of
2003, it was only appointed in January 2005 and met for the
first time last week. The meeting coincides with a period of
rising interest rates internationally and excess liquidity in
the Egyptian market, factors that would call for a rise in
CBE's rates. Such a rise, however, would increase the cost
to the GOE of funding its deficit.

4. (SBU) Comment continued: As reported in reftel, the GOE
members of the Coordinating Council are all reform-minded and
supportive of the CBE's current monetary policies. The
timing of the Council's "operationalization" may therefore be
intended, as the GOE claims, to strengthen the recent success
of CBE management in reforming monetary policy. On the other
hand, as the private sector fears, it may be intended to keep
CBE management from becoming too independent. Given the
GOE's need for inexpensive financing to fund its deficit, and
the sensitivities surrounding possible cuts in fiscal
spending right before an important election, the latter
explanation bears keeping in mind as we watch interest rate
policy in the months ahead.

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