Economy in a week: CBE keeps interest low despite inflation fears
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Against the backdrop of a major government reshuffle, maintaining the status quo was the dominant theme of last week’s economic news, with the Central Bank of Egypt keeping interest rates low despite inflation fears and Moody’s maintaining it’s dour outlook on Egypt’s banking system.

CBE holds rates unchanged for the second meeting in a row

Despite weak economic growth, the Central Bank of Egypt (CBE) decided to maintain interest rates in what could be an aversive reaction to bloated prices on the market.

The headline consumer price index (CPI) increased by 1.42 percent in January, compared to a decline of 1.02 percent the month before. The increase in price was largely driven by higher prices of several food items, as stated in the monetary policy committee’s press release on Thursday.

Annual inflation peaked in November at 13 percent, and dropped to 11 percent in January — but the double-digit figure is a cause of concern when compared to the 1.04 percent GDP growth in the first quarter of FY2013/2014.

The first quarter of FY2013/2014 witnessed sluggish economic development on the back of timid growth rates in most key sectors, namely manufacturing and construction. The contraction in the tourism and petroleum sectors, by 28.3 percent and 3.5 percent, respectively, took a toll on the economy’s performance.

The CBE’s expansionary policy, coupled with the introduction of two stimulus packages, has not provided the quick-fix solutions that the government under former Prime Minister Hazem al-Beblawi had hoped for. Investments dropped by 14.1 percent year-over-year in the first quarter of FY2013. A year earlier, investments fell by 2.9 percent in the same comparative period.

However, only 30 percent of the first stimulus package has been spent, while the second was only just announced in mid-February.

Recent figures from the CBE reveal that credit provided to the private business sector has witnessed a slight drop between the months of June and November, while the Ministry of Finance monthly report shows that credit to private sector as a percentage of total credit had shrunk by 0.4 percent between July and October 2013.

Since August, the CBE lowered interest rates by a cumulative of 150 basis points to spur credit growth (while also lowering debt service on government loans). However, the move has proved to be futile so far.

With inflation still in the double digits, the move to lower interest rates further could prove risky, especially when the return for doing so has not been reflected in increased economic activity. Although double-digit inflation has not prevented the CBE from loosening its monetary policy in the past, the risk of food inflation, or price stagnation, at a precarious time like this can be unsettling to the government.

However, the CBE’s statement elucidates that inflation is not a risk now. Undersigned on the press release, Rania al-Mashat, the CBE’s sub-governor, said: “Downside risks that surround the global recovery on the back of challenges facing the euro area and the softening growth in emerging markets could pose downside risks to domestic GDP going forward,” and therefore limits upside risks to inflation.

Moody’s negative outlook on Egypt’s banking system

Moody’s Investor Service released a report last week outlining the negative outlook for Egypt’s banking system, which has gone unchanged since 2011.

The report said that the government’s strained finances amid the continuing social and political tensions have continued to undermine investor and consumer confidence.

“The outlook for foreign investment, tourism and consumer confidence remains weak, leading to subdued credit growth and low business generation for banks,” said Senior Credit Officer Constantinos Kypreos.

The agency expects that over the coming 12-18 months, banks will increase their exposure to government securities, which reached 5.7 times their shareholders’ equity as of September 2013.

However, despite the shortcomings of the banking system, the report expects banks to remain well funded because of their strong deposit base, where total deposits account for 75 percent of banking assets as of November 2013. This enables local banks to operate without dependence on foreign funding.

The report expects the economy to regain strength on the medium term, when structural and fiscal issues are addressed.

Arab Aid

The Ministry of Finance released a detailed account of the aid received from Arab countries in the six months following the army-backed uprising on June 30. The amount totaled US$10.7 billion.

Gulf Aid between July-December 2013 (US$ billion)


CBE Desposits

Financial aid

In-kind aid


Saudi Arabia






















Gulf Arab states have pledged US$12 billion since the July 3 ouster of former President Mohamed Morsi. Saudi Arabia and UAE pledged further aid in late January in the form of bank deposits and petroleum products.

Sherif Zaazaa 

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