The Governor of the Central Bank of Egypt, Hassan Abdullah, after assuming office on August 18, tried to have his own monetary policy, so he fixed the interest rate during August and September, despite the US Federal Reserve’s continued noticeable interest rate hike and the subsequent rate hike. Eurozone, the United Kingdom, Canada and other foreign and Arab countries.
He tried to take alternative ways to raise interest, the most prominent of which was reducing the cash circulating outside the central bank’s coffers during August and September, contrary to the policy of the previous governor who expanded the issuance of cash during the previous months of the current year, and he also raised the compulsory reserve ratio through which banks are obligated to deposit A percentage of its deposits in pounds at the Central Bank without interest, from 14% to 18% last September.
Raising interest in the Egyptian case will lead to an increase in inflation rates and not a decrease in it, as the IMF and the Central Bank say. It is stagnation in the markets, and this is for a major and clear reason that it is inflation resulting from supply shocks and not as a result of demand.
He openly declared in his justification for not raising interest during the Monetary Policy Committee statement on September 22 that fixed the interest rate, that the rise in the annual rate of inflation since the beginning of the year is mainly due to shocks from the supply side, in particular the rise in global commodity prices.
However, the pressures of the International Monetary Fund on Egypt, which includes a demand to raise the interest rate at large rates as a condition for announcing approval of lending to Egypt, forced the governor to change course by raising the interest rate on October 27 by 2%, coinciding with the depreciation of the pound against the dollar by 16%. .
Repeating the scenario of 1991 and 2016
The governor justified raising the interest rate at that time by saying that it was done with the aim of containing inflationary pressures resulting from the demand side, the high rate of domestic liquidity growth, inflationary expectations, and the secondary effects of supply shocks, which prompted the fund to announce its agreement to lend to Egypt at the level of experts on the same day and after the approval of the fund’s board of directors on the loan. amounting to $ 3 billion on the 16th of this month, demanding during his approval to raise the interest rate among other demands, the governor raised interest by 3% less than a week after the approval of the fund.
This is how the Egyptian administration repeats the path that it took in 1991 by raising interest in response to the fund’s request during the reign of Governor Salah Hamid when concluding a lending agreement for Egypt, and this was repeated during the reign of former governor Tariq Amer at a rate of 3% also in November 2016 when lending the fund to Egypt, despite the governor’s realization The present study of the various harms that may be caused by raising the interest rate for economic activity, which he practically touched during his long work in the banking field.
The direction of the Egyptian administration to implement the terms of the fund, which has been proven practically during the past years to have a temporary effect, as evidenced by Egypt’s repeated resort to the fund a few years after each agreement with it, and wasted the opportunity to adopt an Egyptian reform approach by solving chronic and current economic problems in a different way, consistent with driving growth, investment, industrialization, export and employment And strengthening the position of the Egyptian pound against foreign currencies, and adopted the path of raising the interest rate, which leads to counterproductive results for all of the aforementioned goals.
Raising interest at these current high levels, accompanied by other problems for producers related to the shortage of the dollar, the difficulty in procuring raw materials and production requirements, the high cost of energy, bureaucracy, and the crowding out of military companies in economic activity, leads to a decline in industrial, investment, export and operational activity, especially with the expectation that the Central Bank will continue to raise the interest rate during the year. Next, due to the expectation of higher inflation rates next year.
The stagnation in the markets refutes the allegations of the Fund and the Central Bank
On the other hand, what confirms that raising interest in the Egyptian case will lead to an increase in inflation rates and not a decrease in it, as the IMF and the Central Bank say, is the stagnation in the markets, and this is for a major and clear reason that it is inflation resulting from supply shocks and not as a result of demand, as the governor said previously in his statement. last September.
This is exactly what the local media used to say, quoting government officials, that inflation is a result of the rise in global prices and its remoteness from the repercussions of the Russian-Ukrainian crisis, although there are also local causes of inflation that have a great impact. Those causes, whether global or local, exonerate the demand side from causing inflation as well. The Central Bank says since late October until now.
By claiming that the cause of inflation is the demand side, represented by the increase in Egyptians’ desire to buy commodities at rates that exceed the quantities produced, and that raising interest would prompt them to save and reduce purchases, which is a false claim according to the Purchasing Managers’ Index, which indicates the existence of a continuous stagnation in the markets without interruption over the past two years. As this recession prevailed in the previous months.
The Egyptians went through repeated crises, beginning with the repercussions of Corona and the effects of the rise in energy and food prices globally and locally last year, and then the repercussions of the Russian-Ukrainian crisis, which led to a decline in the purchasing power of most Egyptians, as evidenced by the reports issued by the government statistics agency, and as evidenced by the decline in sales of many companies and the decline in public budget revenues as a result. According to the statements of the Minister of Finance and the published data on the non-achievement of revenue targets in the state’s general budget, which has also caused an increase in poverty rates.
These matters required alleviating the producers and not increasing the burdens on them through continuing to raise the interest rate 4 times this year, with a total of 8%, and canceling the initiative to finance industry, agriculture, contracting, and new energy last month, which was granting loans at a rate lower than the prevailing market rate, and here we are now. To a rate of lending from the Central Bank to banks of up to 17.25%, and it is natural for banks to add to this a profit margin of not less than 3% when lending to companies, to reach a rate of 20% and more for the rate of lending to companies.
Unequal competition for Egyptian exports
It is a competition between companies that suffer from a rise in the price of the dollar locally this year by 57% according to official prices, which exceed that according to parallel market prices, so the question remains how these companies compete with the products of other countries in the local market or in the international markets, with the lending interest currently reaching 1.9. % in Denmark, 2.6% in Sweden, 2.75% in the euro countries, 5.5% in the Philippines, 6.25% in Indonesia, 7.75% in Romania, and many other countries that have less interest in lending than Egypt, such as the Czech Republic, Turkey, South Africa, Belarus, and even Sri Lanka, which Its lending ratio is 15.5%.
Those involved in the Egyptian industry know that high bank interest was the cause of 80% of companies’ failure cases, and from here we expect that the current rise in interest will cause a decline in the productive capacities of many companies, in various activities, whether food, engineering or building materials industries because of their impact In the field of real estate and pharmaceuticals, which are restricted to compulsory prices, which leads them to reduce the production of certain items.
And with the decline in production as a result of the decline in sales due to the decline in purchasing power, a part of the employment will be dispensed with in some companies, which will increase the ranks of the unemployed, and with the lack of production, this will affect the quantities available for export, in addition to the high cost of production and its impact on its competitiveness, and the lack of local production leads to its replacement by import. This increases pressure on the exchange rate.
What is more dangerous is that some resort to depositing their money in banks and obtaining those high interests that do not have any taxes, instead of entering the productive fields and entering into the spiral of obtaining licenses, lands and facilities, and extortion by representatives of local and regulatory authorities to pay periodic royalties for not issuing violations. And unequal competition with sovereign entities that do not pay taxes or customs and enjoy the provision of land for free.
Increased government debt and budget deficit
The government itself will be affected by the interest rate hike, as government debt interest represents the largest component of spending in the general budget at a value of 690 billion pounds in the current fiscal year budget, and the Minister of Finance stated when presenting the budget in Parliament before the beginning of the fiscal year, that an increase in the interest rate by 1% increases the cost of debt interest. The domestic budget amounted to 28 billion pounds, and the minister’s speech so far was followed by 3 interest increases, with a total of 7%, meaning that 196 billion pounds will be added to the debt interest in the budget, in which the total deficit was supposed to reach 558 billion pounds, which confirms the increase in the deficit.
The Minister of Finance also stated last August that every increase in the exchange rate of the dollar against the Egyptian pound by about one Egyptian pound increases the value of government external debt denominated in Egyptian pounds by about 83 billion pounds, and the exchange rate has increased since then until now by about 5 pounds. In one dollar at official prices, and if it is added to this that the budget expectations, which predicted a price of $80 for a barrel of oil and $330 for wheat during the current fiscal year, were not met, which exceeded the price of each of them, which increased the value of imports from them.
What happened recently in granting an exceptional bonus of 300 pounds per month to employees and pensioners was not included in the preparation of the budget, all of this will lead to a reduction in investment spending in the budget and delay in paying the dues of suppliers to the government and to seeking to obtain more taxes and fees, as was discussed from the inclusion of a new segment Income tax rate of 27.5%.
This means that the harms of the interest rate hike will extend to the general public, who will be affected by the delay in the implementation of educational, health and utilities government projects across the country, in addition to the impact of delayed payment of suppliers’ dues to the government on the contracting and other sectors with their employment.
Even those who think that there is a winning category from raising interest represented in bank depositors, that category will get interest less than the rate of inflation, that is, you will get negative real interest.
Thus, improving the investment climate, stimulating producers and employing idle energies remains the way to solve the inflation problem by increasing the supply of goods and services and solving the dollar exchange rate problem also by increasing dollar resources from foreign investment and export, while raising the interest rate causes an increase in inflation and damage to producers, investment and political instability and social.