Egypt’s central bank has raised rates of return on the local currency by 1,100 points from March 2022, in a move initially intended to curb inflation and support the Egyptian pound. However, this decision has also increased the burden on the country’s private sector, which is already struggling with the economic aftermath of the COVID-19 pandemic.
According to the Central Bank, the interest rate on overnight deposits, overnight loans, and main operations have increased by 19.25%, 20.25% and 19.75%, respectively, compared to rates of 8.25%, 9.25% and 8.75% since March last year. The central bank said the move was “pre-emptive”.
According to Reuters, annual headline inflation has hit a record high of 35.7% in June, surpassing the peak reached in 2017 following a sharp devaluation under an earlier International Monetary Fund (IMF) programme. The value of the pound has also suffered a severe decline, losing 50% of its value against the dollar, following sharp devaluations since March 2022.
However, some analysts and business people criticised the decision, saying it would harm the economic recovery and increase the cost of borrowing for businesses and consumers. They argued that inflationary pressures were mainly due to supply-side factors, such as rising global commodity prices and supply chain disruptions, rather than excess demand. They also argue that these increases will end up directly affecting customers, as companies will try to mitigate this situation by raising prices, as consumer demand has fallen sharply.
On the other hand, some experts defended the central bank’s decision, claiming that it was necessary to maintain macroeconomic stability and protect the currency. They argued that the decision would help contain inflation expectations and prevent capital outflows.
The IMF agreed in December 2022 to a $3 billion loan to Egypt in order to relieve the North African economy of debt pressure. This bailout package, approved under the Fund’s Extended Fund Facility, will run for 46 months, and will go hand in hand with monetary policies to reduce inflation and a boost to the private sector. The entry of the second tranche of this financing programme is awaiting approval of the IMF’s review.
This increase in interest rates will directly affect companies by disrupting investment and, therefore, their capacity to expand, as well as establishing a high dependence of companies on bank financing to be able to meet these operations, which will lead to an increase in the cost of production.
Source : Atalayar
