As had been expected by analysts and economists, the Central Bank of Egypt (CBE) Monetary Policy Committee (MPC) decided Thursday to cut interest rates for the fourth time this year. The committee cut the overnight deposit rate, overnight lending rate and the rate of the main operation by 100 basis points to 12.25 per cent, 13.25 per cent and 12.75 per cent respectively. The discount rate was also cut by 100 basis points to 12.75 per cent. The decision came on the back of inflation reaching new lows. Annual headline inflation fell to 4.8 per cent in September 2019 and fell further to 3.1 per cent in October 2019, the lowest rate since December 2005, according to the CBE.
With this latest cut the CBE is progressively returning to pre-2016 interest rates. Across the year, the CBE has cut rates by 4.5 per cent. In the months following the floatation of the pound and the $12 billion loan agreement made with the International Monetary Fund in 2016, interest rates were increased by seven per cent. Now, economists believe the interest rate cuts will positively affect investment, providing impetus to revive economic activity in addition to reducing the government debt service bill significantly. Experts have also ruled out that interest rate cuts could affect foreign investment in the domestic debt market, especially after the monetary easing by the US Federal Reserve in late October, and considering the continued strong yield on the pound against the dollar.
Businessmen have long called for the reduction of interest rates. Reducing the interest rate will have a positive impact on the long run, encouraging companies to expand their investments, which eventually affects employment, increases production and thus increases the supply of various goods, which would accordingly reflect in a decline in prices. A decrease in interest rates lowers the cost of borrowing and makes it cheaper to set up projects or expand existing ones. By cutting rates, depositors may also find it more worthwhile to invest, such as in the stock market or setting up new projects.
But while interest rates are important for investment, they are not the only factor in an investment decision. Though the government has already done a lot to attract investment, including floating the currency, introducing value added tax and various new laws to facilitate investment.
Egypt ranked 114th among 190 countries surveyed by the World Bank’s annual Doing Business Report this year, six places higher than last year. It also introduced regulatory reforms that have facilitated various aspects of doing business. These include starting a business, getting electricity, protecting minority rights and ease of paying taxes. For example, it takes 5.5 procedures and 12 days to start a business in Egypt, compared to six and 19 on average for the Middle East and North Africa.
Nonetheless, challenges remain. The Doing Business Report showed Egypt still underperforms in the areas of trade across borders and resolving insolvency. And foreign direct investment remains below targets, coming at around $6 billion in 2018-2019. More needs to be done to encourage domestic and foreign investment if Egypt is to realise GDP growth targets of around six per cent for the current fiscal year, and creating some 700,000 jobs needed annually amid a growing population.
*A version of this article appears in print in the 21 November, 2019 edition of Al-Ahram Weekly.