Farouk al Okdah, Egypt’s central bank governor, will be chairing a monetary policy meeting this afternoon to decide on whether to change the country’s interest rates. It is just days before an International Monetary Fund delegation is due to arrive in Egypt to consider the country’s $4.8 billion loan request.
Egypt is likely to play it safe and maintain the benchmark deposit rate at 9.25% because of pressure on the domestic currency.
But what are the impacts of changing interest rates?
Nothing is more controversial in business and finance than banking, as we saw yesterday with the media storm that erupted after the departure of Vikram Pandit as chief executive of Citigroup.
But the most contentious of all are the central banks. These are organisations sitting at the juncture of both economic and government policy.
Yesterday we saw how controversial this industry can be when the governor of Iraq’s Central Bank was booted over allegations he had intentionally weakened the value of the Iraqi dinar against the US dollar.
“The cabinet decided to authorise Abdelbassit Turki, the head of the Board of Supreme Audit, to run the central bank indefinitely,” Prime Minister Nuri al-Maliki’s spokesman Ali Mussawi said, adding that Sinan al-Shabibi had been suspended from his post by the anti-corruption watchdog.
Is this Déjà vu? Or does it feel like the Egyptian government is repeating the same mantra on energy subsidies almost daily?
The upside of this announcement, which would garner skepticism for a reader that may have seen similar plans announcement over the last few months, is that the plan outlined by petroleum minister Osama Kamal is more detailed than we’ve seen before.
It would mean both rich and poor receive the same allocation of the subsidised fuel and would then pay a higher price for additional amounts consumed. It is a backtrack from the coupon system that was discussed only last week.
There are two recurring economic problems in Egypt: the demands of the massive labour force and the energy subsidy issue. Both are old problems but have been propelled into the limelight post-revolution because budgetary constraints have intensified the situation. These are discussed below.
In just the latest bout of labour unrest, industrial action has significantly disrupted operations at an Egyptian port run by DP World, the world’s third largest port operator.
Iran’s economic pain caused by the plunge of the rial currency may halt subsidy reform. The Iranian parliament voted on Sunday to consider suspending plans for further reform of the country’s food and fuel subsidies.
Iran’s gradual removal of subsidies is regularly cited as a model for other countries in the region. Reforms aimed at easing pressure on state finances by cutting tens of billions of dollars from the amount which the government pays to subsidise low consumer prices for food and fuel. It offset the impact on the poorest by giving them monthly cash payments.
The first stage of reform was introduced in 2010, but now the second phase looks like it will be stopped.