Egypt Monetary Policy Must Factor in Politics, Amer Says

(Bloomberg) -- Authorities must consider the political impact of their decisions while setting monetary policy, Egypt’s central bank governor, Tarek Amer, said Thursday, adding that the IMF has also been “very tolerant” with the country as it presses ahead with sweeping reforms.

“Policymakers have to have the sense of the market,” Amer said at the International Monetary Fund’s annual meting in Bali. “At the end of the day these decisions are very political.”

The comments offered a rare glimpse into the decision-making process the central bank grapples with when trying to determine interest rates as the government is working to curb the budget deficit and boost economic growth. Officials say they are also trying to avoid adding to the burdens of a population of nearly 100 million by taking decisions that could raise prices. Around half of Egypt’s residents live near or below the poverty line.

“You have to have an understanding of the psychology of your community,” Amer said. “You can’t be in closed-doors and think raising interest rates is good, but you don’t know how the community is going to take that.’’

Egypt floated its currency in November 2016 as the first step in broad changes aimed at curbing a crippling dollar shortage, reviving growth rates and boosting investor interest in the Arab world’s most populous nation. The move, accompanied by interest rate hikes and cuts in energy subsidies, helped secure a $12 billion IMF loan, but also sent inflation soaring to over 30 percent -- a level from which it began retreating earlier this year. Amer described to the easing of inflation as “a major achievement for the team.”

Gap Grows Between What Investors Want, And What Egypt’s Offering

The central bank started cutting rates as inflation eased. But as emerging markets took a beating, foreign interest in Egyptian debt waned, resulting in an at least $7 billion outflow over the past few months. At the same time, headline inflation began to accelerate again, hitting 16 percent in September, dashing expectations of additional rate cuts this year.

Amer said the reform process has been difficult, but necessary. Among the biggest challenges was educating policy makers about fiscal discipline and driving home the point that painful measures were necessary to pave the way for greater gains going forward. To that end, Amer said that the country’s relationship with the IMF “was not a picnic.”

Despite some disagreements with the IMF, “I appreciate that they respect our opinion,” Amer said. “They’ve been very tolerant with us.”

Amer said that the tough measures wouldn’t have been possible without the full backing of President Abdel-Fattah El-Sisi, and that with his backing, the central bank had become the government and the presidency’s “chief economic adviser.”

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