Ahmed Abdulrahman Al-Samawi: “I believe our present monetary policies are good.” [Archives:1997/45/Interview]
Monetary policy, and the reform of it, has been central to the overall economic reform of Yemen. Monetary indicators such as the exchange rate of the local currency, money supply, interest rates, credit levels, etc., have all stabilized over the last year. Many people view this as pointing to the success of the reform program. The Yemen Times wanted to tackle a few issues in this field, and addressed itself to Mr. Ahmed Abdulrahman Al-Samawi, the Governor of the Central Bank of Yemen. Mr. Samawi finished his higher studies in economics in the UK in 1968, and returned to work at the Ministry of Economy until 1972. During 1972 to 1974, he was Chairman of the Central Budget Bureau which later became the Ministry of Finance. He then went on to become Minister of Finance (1978-1980), Manager of the Prime Minister’s Office (until 1983), Executive Director of the Arab Monetary Fund, Chairman of the Board of Directors at the Yemen Bank for Reconstruction and Development for six years, and Adviser to the President for 5 years. Since May 1997, he is the Governor of the Central Bank of Yemen. Ismail Al-Ghabiri of Yemen Times talked to Mr. Al-Samawi and filed the following interview.
Q: Let us start with a general outlook. How would you assess monetary policy? A: The main indicators are stable. I am referring to the exchange rate, money supply, credit levels, etc. This is reason to believe that the present policies are good. Of course, we will continue to actively follow developments .
Q: Treasury bills have been used to absorb extra liquidity and at the same cover the budget deficit with printing new money. Have the raisons d’etre of T-bills disappeared? To what extent has this policy succeeded? What is the total money borrowed through T-bills? A: Treasury bills is a public debt tool used for financing budget deficits, if any. This kind of financing is noninflationary, because the issue of treasury bills absorbs money and purchasing power from the public. Treasury bills is a short term debt instrument. They expire in three, six and twelve months. There is high demand for these bills especially the short term ones, as tens of bids submitted by the public are turned down by the Central Bank, mostly because there has not been enough offered for sale. In other words, the auctions are usually oversubscribed. T-bills are a very important tool of monetary policy. When the Central Bank feels there is excess liquidity in the market, meaning in excess of the available volume of goods and services, it issues treasury bills to absorb the excess liquidity thus dampening inflationary pressures. The total amount borrowed by the Central Bank through T-bills is now just more than forty billion riyals. This is the total volume issued, less the total value of redeemed bills.
Q: You said the Riyal exchange rate has stabilized, which is, by and large, true. However, how do you explain the recent fall of the Yemeni riyal against the US dollar? It used to fluctuate in the range of YR 125-130 per dollar but now it has surpassed 132? A: No doubt you had followed closely the large fluctuations which took place in the past. I remember, before the reform program was introduced, there was a 15-20% change in the exchange rate in a single day. In those days, the dollar at one time fetched YR 165. There was, as a result, a flight from riyal reserves to hoarding of foreign currencies. Foreign currencies formed a high proportion of deposits with commercial banks before the reform program started in 1995. Those were the hard days. Then riyal interest rates were raised. At one time deposits fetched an annual return of 27%. Then the Yemeni riyal started to enter a period of stability. This was the result of the interest rate hikes as well as the other introduced reform measures, such as the reduced budget deficit. Those factors brought inflation under control. Time deposits increased, money in circulation fell and confidence in the national currency returned to the public when real interest rates became positive for the first time. But there was a negative side effect to this policy as it resulted in stagnation owing to the high cost of borrowing and the high yield of bank deposits compared with real investment. At one time lending charges exceeded 35%, something you might call a credit squeeze. Borrowers and investors were adversely affected. But coming back to your question, it is not really the Yemeni riyal that has fallen recently. Actually the dollar has risen sharply against all other currencies. The following table will show that during the period January – September 1997, the Yemeni riyal has fallen the least against the US dollar as compared to many other currencies. In other words the Yemeni riyal has appreciated considerably against these currencies in recent months.
The currency depreciation against the US$ in percent is as follows: Yemeni riyal 4.1 Pound Sterling 5.1 Japanese yen 5.5 Singapore dollar 8.2 Australian dollar 9.0 Italian lira 15.4 French franc 15.9 German mark 16.9 Malaysian ringit 20.7 Indonesia rupee 26.8 Philippine peso 28.2 Thai baht 38.1
Q: What has been happening with interest rates? A: Once stabilization of the exchange rate was achieved and inflation became subdued, the Central Bank of Yemen started to lower interest rates gradually until deposit rates fell to their present level of 12%. Lending rates followed suit. But despite the sharp fall in domestic interest rates, the Yemeni riyal remained stable and very strong. The International Monetary Fund and World Bank applauded the Yemeni authorities on their success. Despite the sharp fall in nominal interest rates, real interest rates are still positive by a good margin. The real yield of a Yemeni riyal deposit is much higher than a similar deposit in US dollars, Saudi riyals, UAE dirhams, DM, FFR, and Japanese yen.
Q: The present restrictive credit policy discourages investment. What are your views on this? A: There is no restrictive credit policy as the Central Bank has given the commercial banks complete freedom to lend and make advances. Moreover, ceilings on lending rates have been abolished long ago. The commercial banks, however, try to avoid credit concentration risks. They can lend in foreign currencies, but only for projects which at the end of the day earn foreign currencies. When the Central Bank reduced deposit rates, lending rates also fell and borrowing became easier. Statutory reserve requirements at one time were 40% of deposits, 10% of which was the liquidity reserve. The Central Bank has reduced these statutory reserve requirement to only 15% of deposits and it is even paying the commercial banks interest on them, which means more funds are released for lending as the commercial bank cost of funds are lowered.
Q: There were reports that the Central has helped set up special courts to enable banks collect their money from defaulters. What is the last word on that? A: Yes, the Central Bank has sponsored the setting up of special courts to settle the issue of non-performing bank loans. This action is an additional factor conducive to the expansion of credit and to strengthen the role of commercial banks in the economic development of the country. We now have evidence from the consolidated balance sheet of the commercial banks indicating that credit this year is about 19% higher than it was last year. The stability of the exchange rate and the containment of inflation all encourage an expansion in credit and investment and an increase in bank activities.
Q: We heard there were applications for the establishment of new banks or the opening of branches of foreign banks in Yemen? A: Yes, there are applications for new banks as well as branches of foreign banks. This matter is handled routinely. In general, what concerns the Central Bank in licensing a bank, whether local or foreign, is that it should meet the legal conditions relating to capital adequacy, its ability to safeguard the rights and funds of shareholders and depositors, and must have a responsible management with experience in running banks, and that its operations are overboard and transparent. If these conditions are met, the Central Bank will not hesitate at all in granting the required license.
Q: There are reports that you are pushing for a new banking law? A: Yes, your information is accurate. At this moment, Banking Law No. 36 of 1991 regulates the banking sector. Unfortunately some aspects of this law pre-date the reform program and the new orientation of the country. We have submitted a draft for a new banking law. This has been approved by the Council of Ministers and is now before Parliament for enactment. Once it is passed, we will have one of the best banking laws.
Q: There is a privatization drive that involves some banks. Does the Central Bank have a role in the procedures of privatizing these banks? A: The Central Bank together with the Ministry of Finance are carrying out a comprehensive reform program. Part of that calls for privatizing government banks. But before that can be done, a lot of preparation is necessary. For example, we has to resolve the debt owed by these banks and the debts owed to the banks. We have to re-structure their management and the way they do things. Many issues need to be addressed. So, we have signed contracts with internationally renowned firms to undertake diagnostic surveys and studies of the National Bank of Yemen, the Agricultural Cooperative Credit Bank and the Housing Credit Bank. We expect the Industrial Bank of Yemen and the Yemen Bank for Reconstruction and Development will follow soon. These reviews will help us better assess the situation of these banks, and what can be done, in light of the reform program.
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