The Central Bank of Egypt (CBE) this week terminated initiatives through which the banks could offer loans at low-interest rates to investors with a view to providing them with additional support.
Over the past two years, the CBE has launched several initiatives to support the economy in the wake of the Covid-19 pandemic, such as a real-estate financing initiative for limited- and middle-income individuals, an initiative to support tourism, a campaign to change vehicles that run on petrol to operate on natural gas, and another to upgrade irrigation systems.
Loans made under the initiatives were offered at interest rates as low as eight per cent and compared favourably to the much higher official lending rates.
Observers believe that the CBE’s decision to terminate the initiatives was made in response to a demand from the International Monetary Fund (IMF) to include the expenses of such initiatives in the subsidies item on the government’s general budget.
This means shifting the burden of financing them onto the shoulders of the relevant ministries, such as housing, finance, and tourism, and away from the CBE. The IMF said that placing such initiatives under the umbrella of the general budget would help to end distortions on interest rates in the wider economy.
The IMF announced late last month that it had reached an agreement with Egypt to provide a $3 billion loan, in addition to a $6 billion loan from other partners. It stressed that the loan was meant to be directed towards structural reforms in Egypt’s economy.
Economics professor Hisham Geneina said the new decision would put an end to distorted interest rates, under which the government borrows by buying treasury bills at 13.75 per cent, while high-risk private-sector companies can receive loans at an eight per cent interest rate.
Distortions in interest rates decrease the benefits of monetary policy decisions and can increase financial corruption in private-sector institutions, Geneina said.
As the new decision goes into effect, financing will fall on the shoulders of each ministry, he added. For example, the Ministry of Housing will shoulder the cost of the low interest rates offered for real-estate financing for the middle-income bracket.
Commenting on the move, the Egyptian Centre for Economic Studies (ECES), a think tank, said it was a step in the right direction as it would make the follow-up on spending on such initiatives easier now that they are included in the state budget.
The present multiplicity of interest rates can lead to abuse if proper controls are not put in place, as some might acquire loans at low-interest rates to pay for higher-cost loans, thus negating the whole purpose of the initiative in supporting certain groups, it noted.
However, the new decision was not warmly welcomed by industrial producers, many of which count on such initiatives.
Bahaa Al-Adli, head of the Badr Investors Association, said “the decision was announced less than a month after the Economic Conference was held in Cairo. It is absolutely not in line with the recent presidential and governmental interest in supporting industry and local manufacturing in order to decrease imports.
“Some 90 per cent of factory owners and investors depend on bank financing at low interest rates. If the local banks stop supporting industry, this will double the cost of financing. Instead of acquiring a loan at an eight per cent interest rate, we will now have to get it at 16.25 per cent.
“This will paralyse the industry and halt the expansion of projects.”
Mohamed Al-Mohandess, head of the Engineering Industries Chamber at the Federation of Egyptian Industries, said the federation was in touch with the government to explain the results of the decision on the industrial sector.
He said that the effects of the decision on the economy and on different sectors should be studied thoroughly and each sector should be treated according to its own needs. The government should have differentiated between industry, real-estate investment, and tourism investment when launching or cancelling financing initiatives, he added.
The decision may drive some producers to halt their activities, and some of them had already signed contracts to buy equipment or set up production lines depending on the financing initiative at an eight per cent interest rate, Al-Mohandess said.
*A version of this article appears in print in the 1 December, 2022 edition of Al-Ahram Weekly.