During its meeting on 20 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to maintain unchanged the bank’s overnight deposit rate, overnight lending rate, and the rate of main operations at 27.25 per cent, 28.25 per cent, and 27.75 per cent, respectively.
The committee also decided to maintain the discount rate at 27.75 per cent.
Experts had been at loggerheads over whether the MPC would cut rates or not. Supporters of a cut had argued that cooling inflation figures offered room for the beginning of a monetary easing cycle. Inflation came in at 24 per cent in January, a marked improvement on the peak of 38 per cent seen in September 2023.
However, the inflation rate was virtually unchanged in January compared to December when it registered 24.1 per cent, London research house Capital Economics pointed out. They expect the MPC to start the monetary loosening cycle at its next meeting in April as inflation is set to slow sharply over the next couple of months.
According to a MPC statement, risks surrounding the inflation outlook have increased compared to the time of the previous meeting. “This is due to the increasingly uncertain global and regional outlook regarding the impact of US protectionist trade policies and geopolitical tensions,” the statement said.
The MPC statement said headline inflation is expected to decline substantially in the first quarter of 2025, “driven by the cumulative impact of monetary policy tightening and the favourable base effect.”
According to Capital Economics, headline inflation in Egypt “will slow significantly over the coming months as earlier falls in the pound fall out of the annual price comparison.” They expect inflation to fall back to single digits in March.
Capital Economics believes this should open the door for policymakers to cut interest rates. It forecasts a total of 1,600 basis points of rate cuts this year, taking the overnight deposit rate to 11.25 per cent.
The MPC statement said the downward trajectory in inflation would continue during 2025, albeit at a slower pace given the expected drag effect from measures aimed at tightening the fiscal stance. As such, the statement added, inflation is expected to converge to its historical average over the medium term, suggesting an improvement in expectations.
The prospects of lower inflation were one of the reasons the US rating agency Moody’s Ratings maintained a positive outlook on Egypt. In its decision, announced on 19 February, it said that “measures to tighten liquidity and control inflation raise the prospects of durably lower inflation and interest rates, as the Central Bank’s monetary policy credibility and effectiveness strengthen.”
Moody’s see this as a “relief for the government’s highly stretched debt affordability.”
While maintaining a positive outlook, it affirmed the government’s long-term foreign and local currency issuer ratings at Caa1, which is speculative grade.
The positive outlook, in place since March 2024, is also based on the fact that the CBE has “implemented measures to tighten the money supply as outlined in the International Monetary Fund (IMF) programme parameters,” Moody’s said.
These include, according to the agency’s statement, the suppression and repayment of direct CBE loans to public entities and a tightening of reserve money growth.
The Caa1 rating and positive outlook are also built on a set of fiscal measures that Moody’s expect to be implemented or that they expect to start yielding results, such as government plans to complete subsidy reforms by the end of 2025.
Plans for tax reforms that include removing some VAT exemptions and preferential tax treatment for public entities will help the government to achieve and maintain primary surpluses of 3.5 per cent of GDP starting in fiscal year 2024-25, the agency said.
During the past six years, the primary surplus has averaged 1.3 per cent, according to statements by the former minister of finance in April 2024.
The recovery in Suez Canal receipts was also seen as positive by Moody’s, as this would expand revenues. Suez Canal revenues have been hit by the war on Gaza. According to statements in December 2024, the canal lost $7 billion in revenues since the war in Gaza began. It earned $9.4 billion in fiscal year 2022-2023.
With a ceasefire in place, hopes are high that the international shipping lines can resume their trips through the Canal. On Monday, Suez Canal Authority (SCA) Chairman Osama Rabie stated that 47 ships have resumed using the Suez Canal since early February instead of taking the longer Cape of Good Hope route.
The positive outlook also reflects prospects of an improvement in Egypt’s external position, said Moody’s.
“Significant foreign direct investment [FDI] inflows and future project development commitments, together with the shift to a market-based exchange rate regime, have boosted capital inflows and replenished Egypt’s liquid foreign exchange reserve buffers to $36 billion (4.6 months of imports) in January 2025 and allowed it to regain access to international capital markets at affordable rates, which will help the economy to meet its large external financing needs,” the agency said.
It estimates external debt-service payments to peak at $33 billion in fiscal year 2024-25. This sum will translate into pronounced increases in outflows of foreign currency at particular times and could translate into a significant weakening of the monetary system’s net foreign assets (NFA) position if not offset by fresh capital inflows, Moody’s warned.
However, they added that “the positive outlook speaks to the likelihood that more credible monetary and fiscal policy through these episodes will help secure such inflows and maintain macrofinancial stability.”
The rating agency warned that challenges to monetary policy and the floating exchange-rate policy may arise if demand for foreign exchange increases significantly, possibly because of capital outflows or lower confidence in the Egyptian pound, on the back of adverse regional geopolitical dynamics.
Meanwhile, it said that “challenges to fiscal policy may stem from pressures to meet important social spending needs while maintaining consequent primary surpluses, or difficulties in broadening and deepening the government’s revenue base.”
Sustained robust GDP growth to support government revenue, and the continued confidence of domestic depositors, remittances providers, and foreign investors in Egypt’s local currency are essential for the improvement of Egypt’s debt and external vulnerability profile, the rating agency stressed.
On Monday the CBE announced that remittances grew by 51.3 per cent in 2024 to reach around $29.6 billion compared to about $19.5 billion in 2023.
Zilla Capital forecast that the Egyptian economy would grow by 4.1 per cent in 2025, “fuelled by booming remittances, record-breaking tourism, and transformative mega deals.”
In their 2025 MENA outlook, the investment bank highlighted that projects such as the “New Administrative Capital and the Suez Canal Economic Zone are positioning the country as a regional trade and investment hub, while financial inclusion initiatives are unlocking new domestic growth opportunities.”
However, it warned of foreign-exchange volatility and of foreign participation declining significantly from 2021-22 levels.
Nonetheless, Zilla said that “the outlook could shift with two key catalysts: a resolution to regional conflicts that would bolster Suez Canal revenues and tangible progress in the government’s asset sales programme, which could bring much-needed foreign inflows.”
* A version of this article appears in print in the 27 February, 2025 edition of Al-Ahram Weekly
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