US embassy cable - 05CAIRO2957

UNCLAS CAIRO 002957 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA AND EB/IFD 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EG 
SUBJECT: GOE MONETARY POLICY COORDINATING COUNCIL HOLDS 
FIRST MEETING 
 
REF: CAIRO 
 
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. 
 
 
Visit Embassy Cairo's Classified Website: 
http://www.state.sgov.gov/p/nea/cairo 
 
You can also access this site through the 
State Department's Classified SIPRNET website. 
 
GRAY