Former Central Bank of Tunisia governor Mustapha Nabli talks to Niveen Wahish about post-revolutionary monetary policy in Tunisia and Egypt
hgdfgdf2454Mustapha Nabli served in the sensitive position of Central Bank of Tunisia governor for 18 months following the ousting of former Tunisian president Zein Al-Abidine bin Ali in 2011. Prior to his Central Bank position, Nabli was regional chief economist in the World Bank's Middle East and North Africa group. He spoke to Al-Ahram Weekly about monetary policy management in times of crisis on the sidelines of the 19th annual Economic Research Forum conference held at the headquarters of the Arab Fund for Economic and Social Development in Kuwait last week.
In an economic situation such as that of Egypt and Tunisia in which growth has slowed down, balance of payments deficits are widening, and hard currency reserves are diminishing, what is the best monetary policy to adopt?
Even though during the two years since the revolutions it has made sense to have an accommodative monetary policy [making money less expensive to borrow], now we are seeing inflation continue to go up and you want to make sure that inflation does not become very high and permanent. As a result, monetary policy should be more restrictive.
What about exchange rates?
You have to follow the market and to let the exchange rate depreciate a little because there is a lot of pressure on current account balances. But this has to be measured because the falling of the exchange rate will induce more inflation as well, which is why interest rates have to go up to compensate.
How do you evaluate the Central Bank of Egypt's monetary policy?
I am not following closely, but broadly speaking there is room for greater flexibility in the exchange rate in my view.
Should the exchange rate have been allowed to move earlier than over the past few months?
Yes. Timing is always very important in monetary policy and exchange rate policy. One should not wait too long before things become too difficult to manage. The main feature of monetary policy is to predict and then start acting early on before things start getting too difficult, reserves start depleting, and the market starts betting against you, increasing the pressure. When you start early on and let the exchange rate move, you reduce these pressures and as a result the depreciation is smoother and you will not deplete your reserves and the market will be better managed.
Some observers believe that even if interest rates increase, the current instability and political risks will still not encourage people to convert their hard currency savings into domestic currencies.
There is some truth in that, but what is the alternative? Do nothing? Things will be worse. So it is a matter of managing a situation that is not perfect. But if you keep exchange rates constant and interest rates constant, at some point things will collapse.
Would foreign assistance help in the tight spot the Central Bank finds itself in?
Foreign assistance helped to dispel the high current account balances and finance part of the deficit in Tunisia in 2011 and 2012, and therefore there was less need for depreciation of the currency. Now the question is whether this is going to continue in 2013 and whether Tunisia will get the same amount of assistance or more and whether it will be able to access the international financial markets. With the downgrading of sovereign debt, even with guarantees from the US it is going to be more difficult to mobilise resources on the financial markets. The situation is more difficult and more acute in Egypt because the downgrading of Egyptian debt has been more severe and foreign assistance has not been so forthcoming.
What do you think of restrictions on imports or on foreign currency transactions?
When you have a large balance of payments deficit and you do not have a way to finance it, you have either to reduce imports through quantitative restrictions or through prices through the exchange rate. Economic experience has shown that quantitative restrictions eventually do not work and create lots of problems on their own, so it is better to have a more transparent system in which rationing happens through the exchange rate. The exchange rate impacts imports because they become more expensive and people will demand less. As a result, imports are reduced. Now, under some conditions you can have measures to limit the imports of some goods but these should be the exception and not the rule.
How was being a Central Bank governor different from being an economist?
It is more difficult. When you are in policy-making you have to be very careful because your policies impact people directly. You become aware of the broader context in which you operate, so you look at monetary policy and the exchange rate in this broader context and in terms of what it does to economic and political stability, social stability, and the broader situation of the country. When you are an economist, you tend to focus on specific issues and ignore wider dimensions.
© Al Ahram Weekly 2013
