Hard decisions

Al-Ahram Weekly Editorial
Tuesday 4 Apr 2023

In a widely anticipated move to ease spiralling inflation and support the depreciating currency, the Central Bank of Egypt (CBE) hiked interest rates by two per cent last week. Now the bank’s overnight deposit rate stands at 18.25 per cent and the lending rate at 19.25 per cent.

 

In a statement announcing the decision, the CBE said the hike is a necessary condition for achieving the upcoming inflation targets of 5-9 per cent by the fourth quarter of 2024 and 3-7 per cent by the fourth quarter of 2026. This is the CBE’s first hike in 2023. The CBE had hiked rates by eight per cent in total in 2022, all with the aim of containing inflation.

Egypt’s annual headline inflation had reached 31.9 per cent in February 2023, up from 25.8 per cent the month before. The CBE attributed this to “supply shocks caused by supply chain disruptions, mainly affecting poultry, the exchange rate fluctuations since March 2022 and the seasonal impact of Ramadan; from pilgrimage trips to food prices.”

The local currency exchange rate to the dollar is almost 50 per cent lower than its level last year before the start of the Russian Ukrainian conflict. The decline in the local currency exchange rate was exacerbated after the government reached a $3 billion bailout deal with the IMF in October, according to which Egypt committed to a totally flexible exchange rate. The pound is now trading at around LE30.9 per dollar in banks compared to around LE15 per dollar in March 2022. Going forward it is expected that the pound will slide gradually to LE 32.50 per dollar by the end of the second half of 2023 before recovering to LE 30.00 by the end of the year.

For the last few months, the prices of all basic items including meat, poultry, fruit and vegetables have been seeing record highs. To help citizens out, the government is offering subsidised goods in state-owned outlets as well as introducing a pay rise for public servants. In March, President Abdel-Fattah Al-Sisi directed the government to increase public employees’ salaries and pensions. Under the new measures, public employees will see their monthly salaries increase by a minimum of LE1,000 starting April. The minimum wage in the public sector will rise by 17 per cent to EGP 3,500 per month.

A couple of days after the rate hike, both state owned Banque Misr and the National Bank of Egypt issued two new high-yield certificates of deposits (CDs) to attract savings and absorb liquidity and thus tame inflation. The two banks are offering three-year CDs at a 19 per cent rate, and a three-year declining-rate certificate that starts at 22 per cent before falling to 18 per cent in the second year and 16 per cent in the third year. In a joint statement, the banks said the declining rates are thought to reflect a positive view on Egypt’s monetary policy going forward in light of the expected gradual decrease in inflation rates and markets overcoming their current instability due to local and international changes.

Raising interest rates, the CBE follows in the footsteps of major central banks around the world. On Wednesday the US Federal Reserve announced its ninth consecutive rate hike. It raised its benchmark interest rate by another 0.25 per cent to reach a range of 4.75 to 5 per cent. In mid-March the European Central Bank (ECB) also raised interest rates across the euro zone by 0.5 per cent, pushing the bank’s main rate up to 3.5 per cent. Both banks went against expectations that they would hold back on their rate hikes for fear of exacerbating the current banking turmoil and continued to focus on inflation.

In Egypt, while some experts believe the rate hike was unwarranted given that Egyptians’ pockets are already stretched out and that the high interest rates would only be harmful to potential investors, others believe the rate hike was necessary because inflation has not yet peaked. They foresee higher inflation in March and the months to follow. The March figures, due to be announced on 10 April, will reflect the rise in fuel prices implemented in early March, as well as higher prices of food items such as rice which were also liberalised after months of having a cap on their price.

These are difficult times for any central bank to navigate, especially with our economy being impacted by factors outside our control such as the war in Ukraine and global headwinds. While minding inflation, the CBE must keep its eye on GDP growth. Egypt’s economy is expected to grow by 4.2 per cent in the current fiscal year, ending in June, much less than previously forecast. Even the growth targets set out in the draft budget for 2023-24 estimate the GDP growth rate at 4.1 per cent. The solution will not lie only with CBE decisions; attracting investments and exporting are a must to grow the economy, and support the value of the pound.

 


* A version of this article appears in print in the 6 April, 2023 edition of Al-Ahram Weekly

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