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Analysis Central Banks of Egypt and Russia

Free Essays of Economics

Central Banks of Egypt and Russia

Nowadays the world’s economic system consists of a variety of different institutions and regulatory departments. One of the most important sectors of economy – the banking sector – among the multitude of different banks and their general representatives has one unique institution – the Central Bank. Every country has such a specific legal entity that controls the general monetary system and sets the working rules for the financial sector of the country’s economy. However, there are many differences between the Central banks of different countries. The current paper seeks to analyze in detail the central banks of Egypt and the Russian Federation.

Central Bank of Egypt

Central Bank of Egypt (CBE) is the main governmental entity concerning bank operations in Egypt that assumes the authorities and the corresponding power in the country in accordance with the Law No. 88, Year 2003, and the Presidential Decree No. 65 for 2004. (Central Bank of Egypt, n.d.) According to these documents CBE is directly subject to the president of the Republic of Egypt; the legal domicile and the central office of the Bank is situated in the city of Cairo; the general paid-up capital is determined to be one billion Egyptian pounds; the funds of the CBE are considered to be private funds. Only the Board of Directors when reaching an agreement with the Minister of Finance may set a percentage rate of the net-annual profits. This is done in order to obtain higher overall capital of the CBE. (Law No. 88 of The Year 2003 Promulgating The Law of The Central Bank, 2003, June 15. Sec.1. Ch.1. pp. 4 – 5)

According to the main legal document that determines the general use of power (Law No. 88, Year 2003) in the banking sector, CBE is responsible for the work on the establishment of price stability and the overall functionality of the banking system, within the general basis of the policy of the state. Out of this statement, as it is provided in the same document, the Bank’s main objectives and functions are (Law No. 88 of The Year 2003 Promulgating The Law of The Central Bank, 2003, June 15. Sec 4. Ch. 2. pp. 10 -20):

  • Managing the banking sector.
  • Controlling Egyptian foreign currency international reserves.
  • Formulating and applying the monetary policies concerning the banking sector.
  • Providing banknotes, setting their price and specific details concerning their purchase.
  • Managing the FX market.
  • Monitoring price changes and assuring stability of the banking system.
  • Supervising the payment system of Egypt.
  • Monitoring, collecting and calculating the country’s external debt (both the private and public)

Organizational Structure of the Central Bank of Egypt

The overall structure of the Central Bank of Egypt provided in Appendix A, Central bank of Egypt organizational structure, can give general insights on how the decision-making and power distribution are established.

According to the chart, the main body of power in the Bank is the Board of Directors (currently includes five members), which holds control over the most important decisions in the Bank policies, interest rates, formulating the specifications of the monetary policies etc. Special independent committees, assigned to report only to the Board of Directors, are established separately from the overall CBE structure. Their main responsibilities include investigation and control of the treasury, auditing, banking reforms etc. The legal power that reports to the Board of Directors and controls the management of the Bank belongs to the Governor of the CBE. Currently this position belongs to Mr. Hisham Ramez Abdel Hafez. Besides the main administrational departments such as Finance, Internal audit, HR, Risk management and others there are two important organizational branches: Monetary Stability and Banking Stability, each supervised by a Deputy Governor. The Monetary Stability branch includes departments responsible for macroeconomic modeling and forecasting, monetary policy analysis, treasury management, general banking operations etc. The Banking Stability branch includes departments such as licensing, informational security, technology and payment systems, banking supervision etc.

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Monetary Policy of the Central Bank of Egypt

Banking sector in general and the monetary system of Egypt entrust the CBE with the responsibility for formulating and establishing the monetary policy, focusing on the main and most important objective – maintaining price stability. Central Bank is assigned to maintain low rates of inflation, which is considered to be the key factor for sustaining continuous increase in investment and economic growth in the country. The main objective of the monetary policy in CBE is to adopt a full-fledged inflation-targeting regime once the basic prerequisites are accomplished. Up to this day, CBE has achieved:

· The adoption of the Central Bank’s instruments as the basic instruments for liquidity supervision by using open market operations. After this CBE introduced an Interest Rate Corridor system in June 2005. In general, the Corridor consists of two facilities – the overnight lending and the overnight deposit. The interest rates on these facilities define the high and the low limits of the corridor. The CBE decides on the corridor within which the overnight rate can fluctuate, this is done by the appropriate adjustment of the interest rates. In general controlling the overnight interbank rate in this corridor is the main operational target of CBE. The Bank has a special Monetary Policy (MPC) committee that establishes the interest rates.

  • Transition from a quantitative operational objective – excess reserves, to overnight inter-bank rate.
  • Establishing the objective of the monetary policy operations to influence (increase) liquidity in the market through an auction schedule announced publicly.
  • Using a small open economy gap model (Central Bank of Egypt, n.d.).

General results of such achievements proved that CBE is moving in the right direction in order to meet its inflation objectives by maintaining short-term interest rates, considering the developments in credit and money supply and studying other possibilities to control the rate of inflation.

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Current Monetary Policy of the Central Bank of Egypt

As for the results of the most recent meeting of the Monetary Policy Comity on October 16, 2014, the main rates are as follows: , the Central Bank’s main operations rate, overnight lending rate, and overnight deposit rate stand at 9.75 percent, 10.25 percent, and 9.25 percent, respectively. The discount rate is at 9.75 percent. (Al-Mashat, 2014). Compared to the previous meeting of the MPC the rates have not changed. Such decisions are the results of positive general forecasts concerning economic growth and stability due to stable investments into domestic mega projects such as the Suez Canal.

Central Bank of Russia

Central Bank of Russia is a unique institution, which has the only right to issue currency and insure the stability of the national currency “ruble”, which is practically its main objective. The main central office of the Bank is situated in the city of Moscow. The CBR is the only entity that can issue currency in the Russian federation. According to the Russian constitution, CBR doesn’t have the right to influence legislation, however it takes part in the law making process not only issuing its own regulations but also considering and approving statutory acts of federal institutions of executive power that correlates to the performance of the functional possibilities of the CBR itself. CBR is reported to the State Duma of the Federal Assembly of the Russian Federation that can either appoint or dismiss the Chairman of the CBR and members of the Bank’s Board of Directors. (The Constitution of RF. Sec 1. Ch. 3. Article 75.)Today’s reserves of the CBR are up to $521 billion in total (approximately $367 billion are in foreign currency). CB of Russia is a member of the Bank of International Settlements – this is a special international organization whose members are only central banks of different countries.

The Central Bank of Russia commences its functions according to the laws stated in the Constitution of the Russian Federation and some other specific laws of the Federation. The main functions of the Central Bank, according to Article 4 of the CBR Law, are:

  • Issue cash and organize cash circulation
  • By collaborating with federal authorities, elaborate the unique country’s monetary policy
  • Set appropriate rules and regulations necessary to perform banking operations
  • Service budget accounts of the country’s budget system at all possible levels.
  • Manage the CBR’s international reserves
  • Register securities issued by credit institutions in compliance with federal laws
  • Set the country’s banking system accounting and auditing rules
  • Provide and publish official exchange rates of foreign currencies in relation to the national currency.
  • Supervise the credit institutions and specific banks (Bank of Russia Today, 2014)
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Organizational Structure of the Central Bank of Russia

The general structure of the Central Bank of Russia provided in Appendix A, Central bank of Russia organizational structure, is quite complex, however it can provide insights on how the bank’s administrative system functions.

The highest managerial position in the Central Bank of Russia belongs to the Bank’s Governor, currently Elvira Nabiullina. The Governor is appointed or dismissed by the State Duma. (on the proposal of the President of the Russian Federation). There are three positions in the Bank’s system that are accountable only to the Governor: The Secretary of the CBR Governor, CBR Executive Officer and the Press Service Coordinator. The Governor distributes his power among his Deputy Governors (they are considered to be higher Deputy Governors) who according to their positions, have their own Deputy Governors. These Governors manage numerous departments depending on the sphere of their competences.

Monetary Policy of the Central Bank of Russia

According to the current monetary policy approved in 2014 by the Bank of Russia, the main goal is to ensure price stability that implies maintaining a steady low growth in consumer prices that is, in general, the basic requirement for economic growth. The monetary strategy also includes achieving quantitative inflation targets, making crucial decisions based on forecasts of economic development and inflation rate changes.

In order to successfully conduct the monetary policy for the period of the next three consecutive years, CBR has established a set of goals that should be achieved:

  • The medium term goal of CBR is to lower customer price growth. This process must proceed steadily focusing on the prospects of economic growth in the country.
  • The target value for consumer price changes has to be set for 2014, 2015 and 2016 as 5.0 percent, 4.5 percent and 4.0 percent, respectively.
  • The initial inflation target must be set for the consumer price index (CPI) which is calculated according to the price of a specific number of products and services.
  • CBR targets to increase the exchange rate flexibility and plans to completely change to a floating exchange rate regime by 2015 (The Central Bank of the Russian Federation, 2013).

The success of this monetary policy greatly depends on the joined efforts of the CBR and the Russian Government. Consistent fiscal policy implementation directed at a long-term fiscal sustainability is the one true approach for achieving macroeconomic stability.

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Monetary policy of the Central Bank of Russia includes a wide range of greatly used financial instruments: foreign exchange interventions, required Bank reserves, FX REPO auctions, ruble REPO auctions, unsecured loans, overnight loans, intraday loans, FX Swap operations, operations with CBR Bonds (OBR) etc.

Current Monetary Policy of the Central Bank of Russia

Taking into account the most recent interest rate report (time period: February 2, 2014 – November 5, 2014), it can be stated that the Current Monetary Policy of the Central Bank of Russia reveals such numbers :

  • Overnight loans, FX Swaps, REPO – the rate has increased from 6.50 to 10.5
  • REPO auctions – the rate has increased from 5.50 to 9.5
  • Deposit operations – the rate has increased from 4.50 to 8.5 (Central Bank of Russia, 2014).

Other instruments such as loans of different kinds have also experienced the significant increase in the interest rate. These changes can be explained as the consequences of the current conflict between Russia and Ukraine that has negatively influenced the economy of the Federation. The difficult situation is delaying the possibility to implement the monetary policy plans. Thus, it disrupts the perspectives of economic growth forecasted by the Central Bank of Russia.

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