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The spread must go
Published in Al-Ahram Weekly on 22 - 02 - 2007

An opportunity to lower interest rates is looming, one Egypt's business and banking sector must grasp, writes Ibrahim Nafie
The Central Bank must be pleased to see foreign currency reserves reach $26 billion at the end of December 2006, a sum that covers nine months or so of imports. This is a very reassuring development, especially because it happens at a time when the Egyptian pound is appreciating vis-à-vis the US dollar. Another piece of good news: the rate of economic growth has exceeded seven per cent in the first quarter of this fiscal year. So I imagine many would argue that the Central Bank has nothing to worry about and should keep its monetary policy unchanged. I disagree.
We can do better. And we must watch out for the international market and its repercussions on the local economy. Although the volume of credit offered by Egyptian banks rose from July 2006 to November 2006, and although most of that increase went to the industrial sector, there is still excess liquidity in the banks. This means that there is an opportunity to stimulate the economy further if we do things right.
The current interest rate spread is too high in Egypt, even when compared with other countries at our same level of development. If we bring down that spread, which is the difference between the lending and borrowing rate, I believe we'll have a better chance of stimulating export-oriented industry. This is particularly true in the light of the current economic boom in Europe.
Last year, Europe grew at rates higher than anything it experienced over the last six years. Therefore, the European Central Bank is expected to raise interest rates soon. If this happens, the euro would appreciate vis-à-vis the dollar and consequently versus the Egyptian pound (which is loosely pegged to the dollar). This is an opportunity for us, for it would make our exports cheaper in Europe.
Bankers would resist any reduction of the interest rate spread. They would say that money costs money to manage, which is true. But it should not cost that much. And it doesn't cost that much in similarly- developed countries. If our banks really need that much interest rate spread to keep going, they have a problem and need to fix it.
We have many foreign banks operating in this country now, and they may eventually push our banks out of business unless things change soon. Many of current bank clients are from a generation that is used to public sector banks and their ways. But the younger generations see things differently. And they would be attracted to foreign banks if they offer better services and rates.
The government says it wants all banks, foreign as well as local, to give loans to medium and small projects. But you cannot expect small and medium industry to prosper while the cost of lending remains so high. A serious effort is needed to modernise local banks, lower their running costs, and lead them to lend at reasonable rates. Small and medium industry cannot be expected to compete at current interest rates. The same goes for lenders. People who put their money in the bank need a fair return on their savings. So, the spread must go.


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