The other side of high interest rates

Nahla Abul-Ezz , Tuesday 17 Jan 2023

How will the unprecedentedly high interest rates on certificates of deposit affect the economy as a whole, asks Nahla Abul-Ezz

The other side of high interest rates
The other side of high interest rates


Some of Egypt’s private banks, among them the Commercial International Bank, have decided to follow in the footsteps of the public-sector banks the National Bank of Egypt (NBE) and Banque Misr, which on 4 January issued their highest-ever yielding certificates of deposit with annual interest rates of 25 per cent.

The unprecedented step, intended to support savings in the local currency, came as part of the Central Bank of Egypt’s (CBE) moves to strengthen the Egyptian pound and eliminate the black market for dollars.

Last week, the dollar appreciated against the Egyptian pound, going from LE24.7 to LE32 before stabilising at around LE29.6 after devaluation occurred for the third time in fewer than nine months.

At its mid-December meeting, the CBE’s Monetary Policy Committee also raised interest rates by three per cent to absorb liquidity and curb inflation. Overall, the CBE raised interest rates four times by a total of eight per cent in 2022, once in March (one per cent), once in May (two per cent), once in October (two per cent), and once in December (three per cent).

Most observers believe that the CBE will increase rates again this year, with financial house Capital Economics penciling in a further 2.5 per cent increase. These expectations stem from increases in the inflation rate to reach 21.3 in December compared to 18.7 in November.

However, raising interest rates can take a toll on the country’s budget, as for every one per cent increase in interest rates, the state shoulders another LE30 billion to LE32 billion in debt-servicing.

Ahmed Abdel-Moeti, an economic expert, said raising interest rates would help to curb inflation and probably put the brakes on the increasing prices of commodities. However, it would also decrease demand, negatively affecting economic growth.

Although the CBE had raised interest rates in order to preserve the value of people’s savings, the decision could have negative consequences on the state budget and on companies wanting to take out loans.

The move will increase the cost of lending to companies as well as the cost to individuals paying for items on instalment plans, he said, including for people buying cars. This would mean that companies and individuals would likely put off investment or purchasing decisions until interest rates had decreased, he added.

Economic expert Mustafa Badra said it was unlikely that the CBE would raise interest rates further, because the move would have a negative impact on the state budget and stock exchange transactions.

However, the CBE had made the right move to back people’s savings in the national currency and establish a price for the pound against the dollar, he added.

There is more the state can do to face up to the present economic crisis, said Heba Nassar, a professor of economics at Cairo University. More should be done to support production, help factories back into operation, generate job opportunities for young people, and increase Arab and foreign investment, she said.

These steps would help the economy to grow, helping to lift the burden on people who have been shouldering the costs of economic reforms, Nassar noted. The state should also introduce more progressive taxes on the rich as well as a wealth tax in order for people to feel that the rich are also bearing the brunt of the economic reforms, she stated.

The government should rationalise its expenses, make better use of its assets, and modify its budget rules to trace spending better and maximise returns, Nassar said.

The government should also introduce other measures to manage the economic crisis, said Amr Al-Monayer, a former deputy minister of finance for tax policy.

He recommended targeting small and medium-sized enterprises (SMEs), many of which operate outside the formal economy. They constitute about 96 per cent of registered companies and employ almost half of the workforce, he said.

Lending to SMEs represents only seven per cent of the banking system’s total loans, Al-Monayer said, and though regulations on enterprises operating outside the formal sector offer incentives for two million informal companies to enter the formal economy, only 7,000 have applied to do so.

The law has thus not been successful in encouraging informal businesses to regularise, he said. Though it offers SMEs many advantages, business owners often avoid joining the formal sector owing to higher taxes, though in fact the advantages outweigh the drawbacks, he added.

*A version of this article appears in print in the 19 January, 2023 edition of Al-Ahram Weekly.

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