CAIRO: Domestic liquidity increased 6 percent during July and August from LE 45.8 billion to LE 812.4 billion, according to a report issued this week by the Central Bank of Egypt (CBE). Liquidity in the banking sector refers to a bank's ability to meet obligations without incurring losses, including being able to pay out all deposited funds in a timely manner. Maintaining liquidity requires banks to hold assets that can easily be converted into cash such as government securities, along with sustaining certain levels of deposits. "This increase is quite impressive because liquidity was expected to decline, not increase. I think the change has to do with anti-dollarization, said Magdy Sobhy, an economics expert at Al-Ahram Center for Political and Strategic Studies. The CBE attributed this increase to a 9.1 percent increase in monetary circulation outside the banking system to LE 9.6 billion, and a 5.5 percent decrease in domestic currency current deposits to LE 3.6 billion. According to the CBE, the increase in money circulation can be attributed to a 6.9 percent growth in non-current deposits made in domestic currency, up to LE 3.2 billion. This is a positive development for money supply, which was impacted by the global recession beginning in mid-2008. "Annual growth in money supply peaked at 23.9 percent in March 2008, as foreign and local investments increased in the economy. With the monetary supply tightening and decline in capital inflows throughout 2008, money supply growth dropped, registering an historic low of 6.8 percent in April 2009 before rebounding to 8.5 percent in May 2009 as domestic demand remained resilient, wrote Beltone Financial senior economist Reham ElDesoki in a research note. Meanwhile, foreign currency deposits increased by 6 percent to LE 9.6 billion. Current and non-current deposit levels reached LE 528.8 billion, a figure equivalent to 75.7 percent of the government's total deposits made so far this year. "The strong growth in foreign currency demand deposits from the household and private sectors was counterbalanced by the lower growth of time deposits from both sectors, wrote ElDesoki. Though a 6 percent increase in liquidity can never hurt, experts say that because Egypt's banking system has never struggled with liquidity, this rise won't have a discernable impact on day-to-day operations. "This slight increase won't really impact the banking system in a major way since liquidity hasn't been a problem, Monsef Morsy, a research associate at Pharos Holding, told Daily News Egypt. "There is definitely no problem with liquidity; there hasn't been a problem with it over the past five years. Egypt's loan-to-deposit ratio has been between 50-53 percent during this period as well, which is low by world standards and helps to ensure ample liquidity, he continued. Traditionally, the national banking network has managed to maintain strong levels of liquidity due in part to high minimum deposit levels for retail accounts. Many banks require a minimum LE 2,500 deposit for a basic checking account, with much higher minimum levels for accounts with extra services. Even a no-interest checking account can require as much as LE 2,000 in initial deposits. Though only about 10 percent of Egyptians hold bank accounts, these requirements have bolstered the conservative local banking sector's efforts to maintain liquidity, even in times of crisis. Though liquidity has been a challenge for other economies since the onset of the global recession, the crisis mentality that has consumed Egypt's banking sector has actually, in some ways, helped maintain liquidity levels. "Because of the global financial crisis people prefer to keep their money safe in the bank rather than invest, especially as Egypt's central bank has guaranteed the accounts. This has helped to ensure liquidity throughout the crisis, Morsy explained. Egypt's banking sector has several other factors working in its favor including low debt ratios, a robust bond market, and an ongoing program of reforms Egypt has a low credit-to-GDP ratio due to the fact that so few people hold bank accounts. While this is a negative indicator on the growth scale, it has helped Egypt maintain relative isolation from market factors that have sapped liquidity in other economies since the crisis began. Because of low participation in the banking system, however, an important traditional tool for controlling liquidity, interest rate cuts and hikes, has been rendered largely ineffective in Egypt. On the other hand, Egypt's bond market has helped provide liquidity stability. A healthy bond market allows the banking system to absorb or inject liquidity when necessary. Regardless of how individual banks handle their liquidity needs, a framework of standards across the industry is necessary for the banking sector to survive and thrive. Egypt has accomplished this through a disciplined monetary policy reinforced by conservative norms in the sector. Reforms, including improving bank supervision, restructuring and consolidation, as well as cleaning up non-performing loans have all contributed to the current relative healthy state of the Egyptian economy.
