The Central Bank of Egypt (CBE) decided at its regular monthly meeting last Thursday to maintain its main interest rates at 9.25 per cent for the overnight deposit rate, 10.25 per cent for overnight lending, 9.75 for main operations, and 9.75 per cent for the discount rate. This is the fifth month in a row that the CBE's Monetary Policy Committee has decided to keep rates unchanged, driven by a decline in the annual headline urban inflation rate from 5.6 per cent in June to 4.2 per cent in July and the high level of global uncertainty, according to a statement. The rates are the lowest since 2016 when Egypt embarked on an economic reform programme that included the floatation of the local currency, triggering high inflation and interest rates until late in 2019. The CBE said in a statement that monthly headline urban inflation had recorded 0.4 per cent in July 2020 compared to 1.8 per cent in July 2019. Annual core inflation declined from one per cent in June 2020 to 0.4 per cent in July. Keeping interest rates unchanged was an expected move, according to experts. Radwa Al-Swaify, head of research at the investment bank Pharos Holding, said it would have been difficult to increase interest rates as this would have led to additional financing burdens on the state budget, referring to the cost of domestic government debt. However, it would also not have been a good idea to lower rates since there was a need to continue to attract investments in government debt instruments, bonds, and treasury bills, she said. High interest rates are enticing to foreign investors who borrow in currencies where interest rates are low and invest in countries such as Egypt where they are high. Al-Swaify pointed out that inflation was expected to record four to 4.5 per cent in July and August on an annual basis and five to 5.5 per cent in September, October, and November. It is expected to end the year at six per cent. The CBE can increase interest rates to rein in inflation, but as long as inflation is low, the same will likely be true of interest rates. Maintaining interest rates unchanged is likely to continue until the end of 2020, Al-Swaify said. “This will change when the economy is sure to recover from the effects of the Covid-19 pandemic,” she added. London-based economic research consultancy Capital Economics believes that Egyptian policy-makers remain cautious about delivering more monetary stimulus, adding that the CBE was reluctant to step up support because of possible effects elsewhere. Policy-makers likely have one eye on the Egyptian pound and may be concerned that with several parts of the world experiencing a possible second wave of the coronavirus this could lead to some fresh volatility in global financial markets, it said. Egypt is facing economic repercussions due to the spread of the Covid-19, which has caused losses to the tourism sector and a decline in foreign-exchange flows over three consecutive months to a low of $36 billion in May compared to $45.5 billion in February. Preliminary data show that real GDP growth for the 2019-20 fiscal year was 3.8 per cent, compared to 5.6 per cent in the first half of the fiscal year. In its report on Egypt's request to obtain financing worth $5.2 billion over a year as part of a credit-preparedness package, the International Monetary Fund (IMF) praised the country's economic reform programme for maintaining macroeconomic stability amid global uncertainty. The IMF, which approved a $5.2 billion standby loan in June in addition to a $2.8 billion rapid financing arrangement, said that Egypt aimed to give priority to health and social spending, reduce risks to debt sustainability, rebuild foreign-currency reserves, and strengthen its monetary policy framework. It said that before the Covid-19 pandemic, Egypt had been one of the fastest-growing emerging markets, achieving economic stability after a successful economic reform programme implemented from 2016 to 2019. It said that the pandemic had changed Egypt's macroeconomic forecasts, however. Since the global recovery is now expected to be more gradual and domestic activity will likely remain weak for a longer period, growth in the 2020-21 fiscal year had been revised down to two per cent, the IMF said. The international credit-ratings agency Fitch Ratings said last month that it was maintaining Egypt's long-term foreign-currency issuer default rating (IDR) at B+ with a stable outlook and projecting GDP to 2.5 per cent in the 2020-21 fiscal year, compared to an average growth rate of 5.5 per cent achieved in fiscal years 2018-19 and 2019-20. It expects growth to recover to 5.5 per cent in fiscal year 2021-22 and to remain at over five per cent in the medium term, after tourism and the energy and manufacturing sectors recover and there are overall improvements in the business environment.
*A version of this article appears in print in the 20 August, 2020 edition of Al-Ahram Weekly
