CAIRO - In an attempt to get the economy back on track, the Central Bank of Egypt (CBE) has kept its overnight interest rates unchanged for the fourteenth day in a row. The CBE kept overnight deposit and lending rates at 8.25 and 9.75 per cent respectively. Although the CBE cited easing inflation in this populous country of 80 million people, analysts believe it was a move to curb the cost of local debts. Egypt's debts total LE1.08 trillion ($182 billion), including external debt worth $34 billion. Inflation slowed to 11.8 per cent in May from 12.1 per cent a month earlier, according to the State-run Central Agency for Public Mobilisation and Statistics (CAPMAS). Inflation reached a record high of 23.6 per cent in August 2008. But keeping the rates at current levels had nothing to do with price hikes, one analyst said. The country's core inflation, computed by the CBE, eased to 8.81 per cent in May, compared to 8.76 per cent in the previous month. The core inflation index excludes fruit, vegetables and energy from the consumer price index (CPI) calculated by CAPMAS. Although the man in the street does not feel an easing of prices, CAPMAS claims that prices of eggs and dairy products have slipped by 0.9 per cent, while fruit rose by 4.5 per cent. Butane jumped by 36.7 per cent, according to CAPMAS. Food and beverages account for 44 per cent of Egypt's consumer price index. Some experts forecast the CBE to raise rates, but with "easing inflation" the move was expected. "The move aims at keeping the cost of local debts at their present level. Increasing rates at this time will increase investment costs. The move is acceptable after the revolution," Suheir Wagih, an economist at Cairo-based Future Investment Consultants, told the Egyptian Mail in an interview. The US dollar averages LE5.95 on the local market, but analysts say it may rise in the wake of falling tourism revenues. They dipped by $825 million in February, the Cabinet's Information and Decision Support Centre (IDSC) said this week. In March, the CBE said the tourism industry was losing $1 billion a month due to lack of security in Egypt. How would the move affect the local currency? "It will not affect the value of the pound versus the dollar in the medium term, as the US dollar has stood at LE5.95 since February. The foreign exchange market is stable in Egypt," Wagih said. The country's foreign reserves shed $9 billion since January. Foreign reserves fell from $36 billion at the end of December to $27.2 billion at the end of May, according to the CBE. Bankers expected the CBE to raise rates to boost local savings, which totalled LE946.9 billion ($159 billion) in May, according to the CBE. Loans given by local banks totalled LE470 billion in May. "Raising interest rates may increase bank deposits. But it will not guarantee an increase in investments. The bank loan-to-deposit ratio stands at less than 50 per cent in Egypt. In other developing countries, the ratio averages 70-80 per cent," Wagih explained. "Theoretically, lowering rates raises direct investment and weakens the currency by depreciating its value. Inflation in Egypt is a complicated issue, it is a result of local and external factors," she said. Who's to blame for inflation? Is it the Government for failing to carry out efficient policies? Or is it producers and traders for failing to meet growing demand? Late US professor of economics Fritz Machlup (1902-1983) had the answer in his book “Review of Economics and Statistics”. He wrote: "If demand-pull inflation is the correct diagnosis, the Treasury is to be blamed for spending too much and taxing too little and central banks are to be blamed for keeping interest rates too low and for creating or tolerating too large a volume of free reserves, which enables member banks to extend too much credit." "Fluctuations in foreign exchange, increasing imports and spiraling world prices of fuel and food are the main reasons for inflation in Egypt," Wagih added.
