CAIRO - As Egypt writes its new constitution, commentators are keeping a close watch on legislation that will safeguard individual religious and political freedoms -- concerns that are of course crucial to the country's future. But an important if less obvious factor in the future welfare of Egyptians will be the role of the Central Bank of Egypt.
The CBE as we know it today was granted the status of an autonomous institution in 1961 in the era of the United Arab Republic. Like other central banks, it performs a range of activities, the main ones being lending to commercial banks, stabilizing the national currency and setting the short-term interest rate.
It is clear that the policies of the CBE must take into account a host of factors such as the amount of foreign aid received by the country, as well as the monetary policies pursued by sister central banks (especially those of Egypt’s main trading partners.) Furthermore, the CBE must harmonize its policies with the government’s economic policy objectives.
There is a sense however that in Egypt we may have gone unreasonably far in this harmonization of activities between the CBE and government. Presidential Decree Number 17 of 2005 effectively strips the CBE of any autonomy. The decree states that the CBE will set the objectives of monetary policy “in agreement with the government, through a Coordinating Council”, and that this council is chaired by the Prime Minister, and comprises amongst its members the minister of finance, the minister of investment and the minister of planning.
Paradox of unemployment
To understand why government meddling with the activities of the CBE is harmful to the majority of Egyptians, we only need to recall that one central problem afflicting Egypt’s economy is that of the high level of unemployment. And the persistence of unemployment in a country where labor is inexpensive is of course something of a paradox, and a problem that needs to be remedied.
One reason that unemployment remains high has to do with the way the CBE sets the interest rate at a level lower than what would benefit the majority of Egyptians. By raising the interest rate, borrowing would become expensive for capitalists, and thus capitalists would naturally have to switch modes of production toward labor-intensive technologies.
The way to guarantee that the CBE safeguards the interests of ordinary Egyptians –– not those of a handful of capitalists –– is to shield monetary authorities from meddling by the government. This is all the more important in the context of Egypt: its recent political process is so clearly intertwined with a struggle to safeguard business interests and economic privileges for some.
Thus, to ensure a bright future for a modern and democratic Egypt, public institutions ––institutions that belong to Egyptians –– should be granted genuine legal independence. We are all aware of the benefits an independent judiciary can provide to safeguard democracy. An independent Central Bank is equally vital for promoting the well being of Egyptian citizens.
*Hany Abul Naga is an economist specializing in income distribution and the public sector.