In an attempt to boost investment, the Central Bank of Egypt has lowered interest rates for the first time since 2010, preferring to boost economic growth than tackle inflation. By lowering the cost of money, businesses have cheaper access to funding, which encourages investments that would accelerate growth.
In its latest press release, the Monetary Policy Committee decided to cut the overnight deposit rate, overnight lending rate and the discount rate by 50 basis points, down to 9.25 percent, 10.25 percent and 9.75 percent, respectively.
Despite inflation rising sharply the fiscal year that ending June 30, the Bank reasoned that the cumulative monthly increase in headline Consumer Price Index inched up by only 2.2 percent in the second quarter of 2013 fiscal year, after increasing by around 5 percent in the first quarter of 2013, indicating a general deceleration of inflation. The concern was prominently addressed in the press release, as lower cost of money can generally drive inflation up.
“Upside risks to the inflation outlook have moderated as the possibility of a rebound in international food prices is unlikely in light of recent global developments,” the Central Bank added.
Real gross domestic product in the first nine month of 2013 stood at 2.3 percent, showing similar weakness to the previous year, which stood at 2.2 percent.
While limitations in the manufacturing sector were a factor in suppressing economic growth, investments also remained low due to the heightened uncertainty faced by the market, says Mostafa Bassiouny, an economist at the Signet Institute.
“The problem with the lack of investment in Egypt is that the business climate is bad. There is a threat of prolonged civil unrest that is stopping investors from pumping money into Egypt,” he asserts.
Weak credit growth in the private sector has hindered fresh investments in the market, due to risk of economic and political turmoil. The rates remain high, even after the decrease, Bassiouny says. He warns, however, that it would be better to decrease rates gradually to avoid causing shocks in the market.
As such, the move is “not expected to induce credit demand and increased borrowing due to uncertainty and the very poor business environment in Egypt at the moment,” he adds. “This is the main issue [in Egypt].”
Although the drop in overnight rates may not instantly attract investments, it aligns with the general direction of the government towards stimulus, says Osama Mourad, financial expert and former CEO of Arab Finance Brokerage.
The fear of foreign exchange pressure has prevented the government from doing so yet, Mourad adds, but with the “generous support and funding received from our Arab neighbours, we can now resort to decreasing the interest rate.”
Gulf Arab countries pledged US$12 billion in aid to help Egypt’s new government shore up the economy after the military’s ouster of former President Mohamed Morsi. Of that, US$5 billion has already been deposited at the Central Bank.
“These actions have been very positively received by the stock market, which has been rising across the board,” says Mourad.
“This has also been well received in the foreign exchange market, driving the black market price of the dollar down to less than half percent of the official rate.”
Both analysts agree that the steps taken by the government are not enough to revive investments in the country, but represent a precursor of the government’s attempt to reduce the cost of doing business in Egypt, and would also allow for easier accessibility of credit in the future.
“Any investment in Egypt now would have to come with very high returns given the high level of risk at the moment. The most important thing that should be done to restore investments is to re-establish business confidence and security,” says Bassiouny.