The controversy continues within the banking market over the past few days regarding the Central Bank of Egypt’s (CBE) decision to raise its basic interest rates by 2% on 21 May.
The surprising decision, as described in the market, was the main topic in the meeting between Tarek Amer, the governor of the CBE, and President Abdel Fattah Al-Sisi on Tuesday.
During this meeting, Amer stressed that his decision aimed primarily at reducing inflation, which is the major obstacle to investment, pointing out that the CBE always takes into account all segments of society, adding that the bank seeks to stabilise prices and control markets.
Regarding this decision, a senior banker told Daily News Egypt that there are two main objectives which the CBE aims to achieve: stability of prices and financial stability.
He pointed out that the stability of prices is the CBE’s main job, in which it always uses several methods, such as raising interest rates, to achieve so, while financial stability is a joint goal between the CBE and the government, notably the Ministry of Finance. He stressed that without achieving these goals, the country will not be able to attract any investment.
“The CBE is currently trying to achieve price stability and to control inflation, and this will only be achievable through raising interest rates, regardless of the objection of those who have personal interests,” a source stated.
According to the CBE’s Monetary Policy Committee, the CBE aims to bring the annual inflation rate to 10-16% during the last quarter of 2018.
The source noted that the CBE is not the only entity responsible for achieving high growth rates, and the increase of investment may not be a priority at the moment. Moreover, the high inflation rate will affect negatively on investment, he said.
“Each period has different objectives, and the CBE’s main current objective is to achieve prices and financial stability and then support investment and growth,” the source said.
The source asserted that any increase in debt instruments will be temporary and that the state should bear part of this decision’s impact.
He pointed out that those talking about the disadvantages of the decision and its negative effects should rather present alternatives to control inflation and stabilise prices.
At the moment, there are no quick alternatives that could achieve this goal except raising interest rates, he said, stressing that if the CBE had not decided to raise interest rates, the expected scenarios could have been worse.
He added that raising interest rates would limit consumption and thus reduce imports, which will in turn have a positive impact on the trade balance and the dollar price.
“The decision to raise interest rates was not aimed at supporting the pound against the dollar, as the price of the pound has been stable recently. Actually, if there was an intention to increase the pound exchange, the CBE would do it directly,” stated the source.
He pointed out that the current price of the pound against the dollar may be appropriate to achieve another goal, which is to attract foreign investors so that they would invest in state debt instruments and the Egyptian stock market.
In a statement last week, Amer revealed that Egypt received about $1bn as foreign investment in the two days following the decision, and this reflects the success of the bank’s monetary policy, which takes into account the conditions of domestic and international markets.
“Let’s hold the CBE accountable for its decision in accordance with the upcoming indicators of inflation, market prices, import rates, trade balance, and balance of payments,” said the source.
The real estate sector is one of the most active sectors in Egypt, where it activates about 90 other industries.
According to Ashraf Abdel Hakam, general manager of the Construction and Design Company, the CBE’s decision to raise interest rates by 2% was a “slap” for investment in Egypt in general and for the construction sector in particular.
This decision will push the holders of capital to put their money in banks to benefit from high returns, rather than investing and taking risks, which will negatively affect all economic sectors. He added that this effect will increase the chances of closing some companies and factories.
He pointed out that there is no economic activity that can achieve financial returns of 20%, like savings certificates in banks.
“Construction companies will face many problems due to this decision, as there are some companies that have received bank loans to implement projects, and the bank’s decision will increase the financial burden on companies,” according to Abdel Hakam.
He added that there are some companies that would like to expand and get new business through bank loans, but this decision will force them to reconsider their expansion plans.
Abdel Hakam pointed out that the profit margin of construction business ranges between 4% and 5%, so increasing interest rates by 2%, while the prices of building materials and construction costs are still unstable, will damage this sector and may lead many companies to end their activities in the market.
“The coming period may also witness a rise in the prices of building materials, especially as most of the factories have obtained bank loans, and they will add the burden on the companies. The decision may also increase prices of housing units in the coming period,” according to Abdel Hakam.
He suggested granting credit facilities to the construction companies, as well as easing the issuance of letters of guarantee, in order to reduce the negative consequences of the decision.
On the other hand, Mohamed Abdel Aal, a board member of the Suez Canal Bank, said that the CBE’s decision was great and will have a positive impact on the national economy.
Abdel Aal ruled out that this decision came upon the requirements of the International Monetary Fund (IMF), stressing that the decision was wise and independent.
“The decision showed the CBE’s insistence to its most important tools in the fight against inflation, which reached unprecedented rates of 32%. Raising interest rates will help the bank bring the inflation rate to 13% in the fourth quarter of next year,” said Abdel Aal.
He added that raising interest rates will also lead to achieving a reasonable exchange rate of EGP 13-15 per dollar by the beginning of the second half of next year.
Abdel Aal pointed out that the increase in interest rates will result in continuous increases in foreign exchange reserves, which will subsequently increase the credit rating of Egypt.
He noted that increasing the country’s credit rating will give the government a better chance to borrow from abroad and sell its dollar bonds in international markets at a lower cost than domestic borrowing, which will help reduce the domestic debt and the budget deficit.
Abdel Aal explained that when the Egyptian pound value gradually increases by two pounds in the near future, it will compensate the borrowers for the high cost of loans, and the devaluation of the customs dollar will also decrease the cost of importing and production inputs; thus, the price of commodities would fall.
He added that raising interest rates will compensate a very large segment of the household sector as a result of the increase in families’ revenue from their deposits in banks. The loans provided by banks to small and medium-sized and microenterprises at a 5% interest rate will reduce the high borrowing cost that resulted from the new rise in interest rates.
Regarding the decision’s impact on economic growth and investment, Abdel Aal said that Egypt has an investment law for the first time, which offers competitive incentives and a promising investment map, in addition to a large market and cheap labour. All of these features would reduce the impact of raising interest on investment.
A prominent banking expert told Daily News Egypt that the increase in interest rates was limited to short-term savings portfolios in banks, because there are strong expectations that the high interest rates are temporary and will decline again.
During the past two weeks, only a few banks raised their interest rates, although the CBE has raised its interest rates by 2% in one go.
The move inside banks was limited to raising the interest of some savings portfolios, which are linked to the deposit rate at the CBE, along with a very limited number of short-term saving portfolios.
Banque du Caire raised its interest rate by 2% on variable yield savings, which are linked to the CBE’s deposit rate. It also decided to increase the interest rate on the rest of deposits and savings accounts variably, while it kept the yield on the savings certificates unchanged.
The National Bank of Egypt (NBE) raised the interest rate on savings accounts of all types by 0.75% and deposits with maturities of less than 6 months by 1%.
The Misr Iran Development Bank (MIDB) raised the annual return rate on savings accounts by about 3% to reach 15% instead of 12%. The National Bank of Kuwait (NBK) also decided to raise the interest rate on deposits, savings accounts, and current accounts with yields by 1%.
The Commercial International Bank (CIB) raised the interest rate on deposits by 1%. The bank kept interest rates on other savings portfolios and retail loans unchanged. The National Bank of Greece (NBG) raised the interest rate by only 2% on variable yield certificates.
The Industrial Development and Workers Bank of Egypt (IDBE) decided to raise the interest rate on savings accounts by 1% and raise the return on deposits by 1.5%.
According to the source, the banks would not price their long-term savings portfolios based on the CBE’s basic interest rates, because this increase addresses only short-term interest rates.
For his part, Abdel Aal believes that the maintenance of high-yield certificates in banks, especially government ones, came only in response to the CBE’s decision.
He added that state-owned commercial banks account for the largest share of deposits and loans in the Egyptian market; therefore, the private banks’ responses do not affect the market.
According to Abdel Aal, it is only a matter of time before the banks that have not moved their interest rates will be forced to raise them to keep their customers and maintain their liquidity. “The profits of banks do not come from the difference in interest rates between deposit and lending only; therefore, the banks will not lose because of the high cost of funds, as some claim,” he said.