Increasing interest rates: controlling inflation or increasing deficit and debt burden?

Mohamed Samir
2 Min Read
TO GO WITH AFP WORLD INFLATION SERIES: An Egyptian woman looks at goods at a supermarket in Cairo on March 12, 2008. The Egyptian government has been struggling to tackle a growing tide of discontent over the sky-rocketing prices of goods. Last week, the authorities announced plans to suspend rice exports for six months from April and the commerce ministry said cement exports will also be frozen over the same period in a bid to combat price rises. Official figures show staple food prices spiralling in Egypt, the world's largest consumer of bread, by 26.5 percent in a year. AFP PHOTO/ KHALED DESOUKI

 

 

Economic experts predict that the Central Bank of Egypt’s (CBE) increase in interest rates will lead to a greater deficit and increase in domestic debt.

The government borrows the most from banks in order to finance its own budget deficit. The government’s current debt is projected to reach 11.5% (EGP 309bn) in fiscal year (FY) 2016/17.

Head of the Research Department at Prime Holding Abou Bakr Imam explained that the CBE should have waited until the end of Ramadan before increasing the interest rates, for several reasons.

“First of all, inflation always rises in Ramadan. Additionally, deposits by the United Arab Emirates and Saudi Arabia are to be received shortly after Ramadan, so inflation may decrease without the need to increase the interest rates,” Imam stated.

He added that—given the CBE’s decision—the budget deficit is expected to increase by EGP 40bn, increasing from EGP 309bn to EGP 349bn, since the hike in interest rates will cause an increase in debt.

 

Imam concluded that the CBE’s decision was made to tackle the expected increase in inflation after

Because government policies have been applied to decrease spending and reduce petroleum and electricity subsidies, Imam said it is an appropriate time for the CBE to increase interest rates in order to control inflation.

 

According to Aliaa El-Mahdy, a professor of economics at Cairo University, increasing interest rates while inflation is rising will help the bank attract new depositors.

 

Nevertheless, the delayed decision should have been implemented a long time ago to control the exchange rate between the US dollar and Egyptian pound, as the current effect may be negligible, according to El-Mahdy.

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Mohamed Samir Khedr is an economic and political journalist, analyst, and editor specializing in geopolitical conflicts in the Middle East, Africa, and the Eastern Mediterranean. For the past decade, he has covered Egypt's and the MENA region's financial, business, and geopolitical updates. Currently, he is the Executive Editor of the Daily News Egypt, where he leads a team of journalists in producing high-quality, in-depth reporting and analysis on the region's most pressing issues. His work has been featured in leading international publications. Samir is a highly respected expert on the Middle East and Africa, and his insights are regularly sought by policymakers, academics, and business leaders. He is a passionate advocate for independent journalism and a strong believer in the power of storytelling to inform and inspire. Twitter: https://twitter.com/Moh_S_Khedr LinkedIn: https://www.linkedin.com/in/mohamed-samir-khedr/