By Nasser Youssef The government's expansion of high interest bonds and treasury bills led to a decrease in financing for small and medium sized enterprises (SMEs), the support of which the state claimed to be the primary goal of the post revolution government. The state resorted to the banking system in order to close the worsening budget deficit. The increase in of bonds and treasury bills led to increased pressure on bank liquidity and negatively impacted loans to the private sector. Mokhtar Youssef, a credit risk official with United Bank, said that private sector financing is hindered by government financing. He explained that many banks have allocated a large portion of their resources to invest in government debt at the expense of providing financing for SMEs in the private sector. Youssef noted that a decline in banks' excess cash reserves affected financing for the private sector. As a result, the Central Bank of Egypt (CBE) reduced the required level of cash reserves in order to increase the banks' liquidity and ability to provide financing. The high interest rate offered on government debt is a major factor that drew banks to invest in bonds and treasury bills. In addition, government debt represents a relatively low risk investment compared to the private sector, particularly SMEs, which carry higher risk. The latest CBE monthly report indicated that securities held by banks grew by approximately EGP 116 million at the end of last April, bringing the value of total investments to EGP 523.07 billion, compared to EGP 522.95 billion at the end of March. Youssef stressed the need for the government to end its dependence on banks in order to close the budget deficit, advising that the government find alternative sources of financing so that banks can pour more investments in to the private sector, particularly SMEs. The CBE has worked since 2008 to encourage banks to finance in SMEs. The government issued a decree the same year exempting banks from minimum reserves requirements in proportion to their financing to the SME sector. The government has also worked to establish a fund to participate in SME financing projects. In addition, the CBE has worked with the Central Agency for Public Mobilisation and Statistics to produce a database on SMEs in order to provide potential investors with better information about the sector, a step designed to encourage investment. Magdy Abdel Kareem, an official responsible for SME financing with the Bank of Alexandria, said that banks directed a large portion of their resources to investing in government debt instead of other economic sectors, adding that the government was offering high interest rates in order to attract financing from the banks. Plans to invest in SMEs differ among banks based on their investment strategies, said Abdel Kareem, highlighting that some banks have shown great interest in pouring large investment in to the sector. Khaled Amary, an official with the Export Development Bank of Egypt, was sceptical that increased investments in government debt would lead to a shortage of financing for SMEs, stressing that only excess liquidity was invested in government bonds and treasury bills. The excess liquidity in the banking system, which ranges between 35 percent and 40 percent, is employed according to banks' policies, Amary added, noting that increasing investment in the SME sector requires public will and confidence, that such focus would solve Egypt's economic challenges.
