For around a year now, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) has kept the Bank's overnight lending rate at 10.25 per cent, the overnight deposit rate at 9.25 per cent, and the discount rate at 9.5 per cent. The CBE, which targets price stability, said in a press release issued following the MPC's most recent meeting last Thursday that, “while the slowdown in economic growth has been limiting upside risks to the inflation outlook, there are possible upward pressures on inflation going forward. Given the mixed balance of risks surrounding the inflation and GDP outlooks and the uncertainty at this juncture, the MPC judges that the current key CBE rates are appropriate.” Walaa Hazem, vice president of asset management at leading investment bank HC, was not expecting otherwise, especially since the MPC meeting last Thursday was the last before new CBE Governor Hisham Ramez took over. “It's normal to maintain the status quo until he develops his own policy,” Hazem said. Ramez took over from former governor Farouk Al-Okda earlier this week. However, according to a senior banker in one of Egypt's largest private banks who preferred to remain anonymous, Ramez has been at the CBE since mid January for the handover, “but he is not going to change things overnight.” Hoda Selim, economist with the Economic Research Forum believes the CBE took a sound decision, given current circumstances of low inflation and low growth. She said the CBE is in what she called a “trilemma” trying to maintain growth, contain inflation and at the same time make interest rate decisions not conducive to more devaluation. When making its decisions, the MPC keeps its eyes on the inflation rate. According to the CBE press release, the headline consumer price index (CPI) increased by 0.15 per cent month on month in December 2012, following a decline of 1.31 per cent month on month in November, bringing the annual rate to 4.66 per cent from 4.25 per cent the previous month. Meanwhile the core annual inflation rate, as computed by the CBE, inched up to 4.44 per cent in December from 4.2 per cent in November. The MPC press release also said that “while the probability of a rebound in international food prices is less likely in the light of recent global developments, the re-emergence of local supply bottlenecks and distortions in the distribution channels, in addition to the recent exchange rate movements, pose upside risks to the inflation outlook.” But even as inflation figures appear to be low, many people believe that the figures are not realistic, with Hazem explaining that this could be the case because the bank's inflation rate is determined according to official prices that regular people do not use. He pointed out, for instance, that the inflation rate counts the price of bread at LE0.1 at the official rate, yet very few people depend on this type of bread. In the light of these factors, Hazem said he did not foresee any downward move of overnight rates in the near future, and instead the CBE might try to raise interest rates in case inflation hikes speeded the depreciation of the Egyptian pound. In fact, he said, the value of the pound against foreign currencies could be a factor in the CBE's decision to raise interest rates. The dollar is officially selling for around LE6.7, but it can sell for as much as LE6.9 on the black market. The CBE might try to raise interest rates in order to stop any dollarisation of the economy, Hazem said. Higher interest rates would encourage Egyptians to convert their foreign currency savings into Egyptian pounds in order to take advantage of the interest rate differential, which could be around four times the interest rate on dollar deposits. While the CBE has on previous occasions said that supporting the Egyptian pound is not its target, such support could in fact be part of the CBE's tactics in trying to stabilise prices in the light of the effect higher dollar rates have on prices. However, “for this step to be effective investors will need to see stability in the foreign currency reserves first, and even some improvement,” Hazem said, pointing out that for this to happen there would need to be a strong recovery in tourism, an increase in the country's exports, and some rationalisation of the country's imports. Hazem did not expect the CBE to increase interest rates to the levels seen in the early 1990s following the structural adjustment programme with the International Monetary Fund (IMF) at the time. Interest rates then reached as high as 20 per cent in order to encourage Egyptians to convert their dollar savings into Egyptian pounds. Such actions today “would harm the investment climate significantly,” Hazem said. Selim agrees. She said “raising interest rates to such levels will harm growth and could lead to a recession. Until now, the CBE has shown concern for economic activity.” The senior banker who spoke on condition of anonymity also did not expect a return to high double-digit interest rates, explaining that at that time Egypt had zero foreign-currency reserves. “The case is different this time round,” he said. Hard currency reserves stood at around $13.6 billion at the end of last month. However, he too was pinning his hopes on high remittances from abroad, as well as the return of tourism revenues. Tourism generated some $9.4 billion for the economy in 2012, well below the $12.5 billion the sector generated in 2010, the most successful year in its history. While he acknowledged that investment was already stagnant because of the political situation, Hazem said that when political stability returns the market will be able to bear a maximum of a one-to-two per cent increase in interest rates, with any more than this being harmful to the investment climate. Higher interest rates would be reflected in higher lending rates, which experts believe would be discouraging to investment. In the meantime, Hazem said that the $4.8 billion loan from the International Monetary Fund, with expected additional assistance from other countries associated with the loan, would help the CBE maintain or increase its level of reserves and would act as a vote of confidence in the economy as a whole and could increase the flow of foreign investment into Egypt. “The IMF loan might allow the CBE to maintain interest rates and not raise them in order to encourage investors while still not facing a dollarisation problem,” he said. However Selim added even that without political stability, this will not be enough. The IMF has said that it is following developments in Egypt closely and that it is standing ready to help. Gerry Rice, director of the Fund's External Relations Department, said recently at a press briefing in Washington that “we understand that the Egyptian authorities are still working on revising their economic programme. Once we receive the authorities' updated programme, we will discuss with them the timing of a possible mission to Cairo.” The senior banker who spoke to Al-Ahram Weekly said that he believed things would be smoother when investors regained confidence in the economy, though he acknowledged that this was only likely to come with stability. Selim reiterated a similar view. She said Investors and households have lost confidence in the Egyptian economy because of the political instability. She said that if things calm down politically, whereby consensus is reached among political parties signaling that Egypt is on a democratization process, confidence may be restored. “Many people are keeping their money in their mattresses because of their lack of confidence,” the senior banking said adding that “once confidence is reinstated, things will get back to normal.”
