The Governor of the Central Bank of Egypt, Farouq el-Uqda, may not know that his rejection to cutting interest rates on lending and depositing in Egyptian pounds since the global credit crunch started is non-understandable for many and that he needs to explain this choice! People follow up world news. They read in yesterday's press that the British Central Bank cut interest rates on pound sterling by 1.5%, for the first time in its history. Earlier, the European Central Bank lowered interest rates by 0.5%. The objective in all cases is to provide liquidity on the markets for them to be able to face the threats of an economic recession! The situation here with regard to harbingers of recession is too similar to the situation in Europe and the US. However, the UK bank has cut interest rates which stand at 4%-5%, while here in Egypt interest rates on Egyptian pounds are close to 16%. Yet, banks still insist on giving loans only in Egyptian pounds and interest rates are still too high in comparison to those in global central banks. Of course, Dr. el-Uqda always keeps a close eye on the inflation rate and does not want it to go on climbing as it has been doing over the past few days, when it exceeded 20%. So Dr. el-Uqda is now facing two dangers. The first is inflation rate; if it goes up, it will cause painful social and economic damages. As for danger number two, it is recession. Recession is often caused by keeping interest rates unchanged at their current level for a long period in light of a global crisis that paves the way for recession as a natural result. Egypt's CBE governor wants to adopt the lesser of two evils. Accordingly, if he refuses to cut interest rates, contrary to what investors in general wish, he, as a governor, is interested in inflation and how to reduce it! Those who oppose the governor's logic try to draw his attention to the fact that inflation rate is not the end of the story, that investments need to be encouraged and that providing incentives and cutting interest rates is the only way for this to happen, as all world central banks do. Almost all businessmen are taking steps to reduce their businesses and labor force. This simply means more layoffs unless the CBE finds a remedy as quick as possible and cuts interest rates. Cutting interest rates would help inject liquidity into the markets and this would help avoid or at least reduce the threat of a recession, which, if it happened, would hit all sectors. If the CBE governor is keen to raise dollar reserves and stand up to inflation by keeping interest rates untouched, we hope he might learn that if we managed to achieve a growth rate of 7.1% in 2008, we want this growth rate to reach the levels seen in India and China (12%) or at least to be protected from a recession. I am not a specialist and the issue needs a clearer explanation from the governor! And he knows it is dangerous to let the current interest rates untouched!
