CBE Interest rates cut marks a cross-over to a new stage in Egypt’s economic reform


CBE​​ Interest rates cut​​ marks a cross-over to a new stage in Egypt’s economic reform

Last week, the government​​ announced​​ that​​ the January inflation​​ rate​​ was​​ at 17%, its​​ lowest​​ levels since the​​ pound’s flotation.​​ This​​ announcement was followed by​​ the​​ lowering​​ of​​ the interest rate and progressing to a new stage in the economic reform process.

Last Thursday,​​ the Central Bank​​ of Egypt​​ (CBE)​​ announced the​​ interest​​ rates​​ cut as a logical consequence of the lower​​ inflation​​ rates.​​ In this article,​​ we will try to evoke international models of reform experiments in both Turkey and Brazil. We will discuss​​ how their monetary policy​​ progressed along with​​ their reforms and lessons learned in the Egyptian experience, and how we have avoided a much worse fate than those who preceded us on this path.

First: Inflation in Egypt


Finally, inflation has​​ become​​ a ghost from the past, after it was​​ growing at a​​ troubling​​ rate​​ for any economist monitoring the progress of the Egyptian​​ economy.

How to determine the appropriate inflation rate for an economy?

The rate of inflation is linked to the rate of growth and​​ volume of consumption in the market​​ as well as​​ variable​​ factors,​​ while​​ the appropriate rate for the Egyptian economy is​​ set at a​​ minimum level​​ of​​ 6%,​​ medium level of​​ 10% and​​ a maximum level of​​ 12%.

The CBE announced its target​​ to reach​​ an inflation rate of​​ 13%​​ by the end of this year, plus or​​ minus​​ 3%.


On the other hand, we have to realise that inflation is not controlled by the government​​ but is​​ rather​​ targeted and tamed by various instruments,​​ mainly​​ the​​ bank’s set​​ interest rate.​​ Therefore, we​​ regularly​​ see in all the data​​ presented​​ the​​ CBE​​ the linking between​​ interest rates​​ and inflation.​​ For​​ example, imagine that you are​​ in​​ a shooting arena, inflation is the​​ target,​​ while​​ interest​​ rate​​ is the weapon,​​ accordingly,​​ you do not control the target, you control the weapon and try as much as​​ possible​​ to​​ accurately​​ reach your​​ target.

What does​​ a 17%​​ inflation mean?

1. This is the biggest drop and best rate since​​ pound’s​​ floatation.

2. This is the first time that the real interest is equal to zero and not negative since the​​ pound’s​​ floatation, real interest = interest on bank deposits - inflation rate

3. Egypt drops from the list of​​ countries​​ with highest​​ inflation rates, which helps to improve the mental image of the economy


Second: Interest rates in Egypt

After inflation​​ fell, the monetary policy committee of the central bank responsible for setting interest rates​​ held their meeting​​ last Thursday evening.​​ The meeting did not take long as previous meetings, especially the first six months after the​​ flotation.

Finally,​​ and to the favour of a lot of economists, investors and think​​ tanks,​​ the committee decided to cut​​ interest rate by 100 basis points or 1% to be 17.75% instead of 18.75%


Thereafter, Governmental​​ banks​​ (National​​ Bank​​ of Egypt​​ and Banque Misr) announced the​​ suspension of​​ the​​ high yield certificates of 16% and 20%​​ interest rates​​ and replacing them with other certificates with15% and 17%​​ interest rates.


Third: Factors that help to reduce interest rates

Several factors and circumstances have encouraged this decision to be taken alongside​​ the declining​​ inflation, such as

  • Unemployment dropped to 11.3%​​ from​​ 11.9%,​​ which is marked as the​​ best rate since 2012.

  • Growth continued to increase to 5.3% instead of 5% for the fifth​​ consecutive quarter,​​ which is also marked as the best rate since​​ 2010.


Fourth: why did we raise the interest rate and why did we reduce it now?


*​​ We raised​​ interest rate​​ for these reasons


1. Supporting the local​​ currency and​​ its​​ purchasing power​​ and​​ counter​​ reduction of support and​​ increased prices due to pound’s​​ floatation​​ in an attempt​​ to curb inflation as much as possible

2.​​ Countering over spending and curbing expenditures, forcing​​ people to​​ adjust their​​ savings​​ and reduce spending,​​ as​​ spending feeds inflation.

3. The temptation​​ for​​ foreign institutions and investors to inject their money in foreign currency into Egyptian government debt instruments which will be characterised by the high return after raising the interest and therefore they benefit from this attractive return and the State benefits from​​ the rising​​ liquidity to meet its obligations and strengthen the economy.



*​​ We cut them down for these reasons


1. Purchasing power stabilised and slightly improved, inflation has receded and some goods​​ prices​​ have already​​ started to drop.

2. The community and the market absorbed the shock of the​​ pound’s​​ flotation and reduced the subsidies​​ and started to recover, especially after the improvement of the purchasing manager’s index issued by Emirates NBD​​ which measures​​ the conditions of the private non-oil producing sector in a number of countries, including Egypt, where it rose from 48.3 points to 49.9 points

3. The suffering of the private sector​​ due to​​ high interest rates​​ has​​ caused​​ an​​ increase in borrowing costs and thus increased​​ the costs​​ of investment and the establishment of​​ new​​ projects.

4. The desire to pursue a policy of expansionist stimulus to the economy by encouraging investment, stimulating growth and creating jobs.​​ 



Fifth: What happened in Venezuela this week?

Inflation in Venezuela has reached 4000% meaning that​​ a​​ commodity purchased by 1 Bolivar in the​​ beginning of​​ 2017, is currently worth​​ 4000 Bolivar.​​ These rates are unbelievable and have rarely happened in the history of​​ modern economy.
















Notes and comment:



Venezuela is not a poor​​ country;​​ it​​ has​​ the world's​​ highest​​ oil reserves​​ and​​ it is​​ 11th​​ globally in oil production and export revenues.​​ The 4000%​​ inflation​​ rate​​ reflects​​ an​​ annual inflation​​ rate,​​ yet​​ the​​ monthly inflation rate​​ reached 84%. Meaning​​ that every 30 days the price increases 84%, while​​ every 35 days more than 100%, accordingly a commodity at​​ 1000​​ Bolivar today will be 2000 Bolivar after only 35 days!​​ What was previously purchased in the Bolivian currency for one million dollars 15 years ago is now bought at only $7.00 on the black market. Of course this means a catastrophic collapse in the purchasing power of the Venezuelan currency.


It is worth​​ noting that​​ monthly inflation in Egypt was minus 0.2% last January, which means a near-stability in the overall average price for the second month in a row.​​ Accordingly,​​ we must bear in mind that this is the fate that awaited us if we did not carry out the difficult and harsh economic measures​​ taken for reform.


Sixth: the experiences of Turkey and Brazil

Brazil signed a loan agreement with the IMF in a comprehensive reform program in November 1998 worth 18 billion dollars. Turkey signed the same year with the IMF and the total tranche after several agreements reached about 45 billion dollars.


When inflation rose to nearly 100 percent in Turkey, the authorities raised interest rates from 30 percent to 100 percent in 2001, at the​​ beginning​​ of reforms.


Brazil did something similar when it raised the interest rate in 2000 to the 45% limit to maintain the purchasing power of the currency.






In Conclusion

All these developments promise​​ accessing​​ a new stage​​ in the economic reform process​​ and enhances​​ optimism​​ towards​​ the future​​ being on the right track. We expect growth to continue at 5% throughout 2018, exceeding all previous​​ governmental​​ and international​​ specialists speculations​​ for the Egyptian economy’s progress.​​ 


We​​ forecast increased investments​​ for the private sector which will​​ benefit from lower borrowing interest rates and promotes expansion and new investments.


The interest rate cut is likely to​​ reach​​ around 4% to​​ 5% by​​ the end of​​ 2018, which is likely to reach 12.75% to 13.75%, which reinforces the investment​​ path​​ that relies on​​ cash circulation for developing​​ business and​​ the economy.


Unemployment will continue to improve​​ in-accordance with new investments,​​ yet is still unexpected how the market will react​​ in response to further subsidy​​ cuts that are inevitable and will overshadow the​​ declining​​ inflation,​​ accordingly it is​​ likely​​ that interest rate will​​ continue to maintain​​ its​​ high rates​​ to counter​​ inflation.


We will continue to follow the indicators​​ track for development,​​ which so far reflects our path​​ on the right track and​​ reflects a stronger​​ optimistic​​ view for​​ 2018, due to the unexpected success of the reform process, which gives an indicator that this year​​ will​​ mark the re-launch​​ of the Egyptian economy.



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