The Egyptian banking system continued its policy of raising interest rates in an effort to reduce the currently high inflation rates, as the Central Bank of Egypt raised the interest rate by 2% on March 30, after raising interest rates 4 times last year with a total of 8%.
The CBE also pushed the two largest government banks in terms of the ability to attract deposits, the National Bank of Egypt and Egypt, to issue two new certificates of deposit on the second of this month with a term of 3 years, the first with a monthly return of 19%, and the second with a decreasing monthly return starting at 22% in the first year, then by 18% in the second year and then by 16% in the third year, i.e. an annual average during the three years of 18.66%.
The issuance of the new certificates by the two government banks comes as an extension of their issuance of savings certificates with a return of 18% in March 2022 for a year, which continued to subscribe for two months, then the issuance of savings certificates with a return of 17.25% last October, then the issuance of savings certificates with a return of 25% in early January for a year to be paid at the end of the term, or with a return of 22.5% in the case of monthly interest and continued to subscribe to them until the end of the month.
Disruptive factors for the impact of interest rates on inflation
These issues were accompanied by the issuance of savings certificates by some private banks, most notably CIB, the largest private bank in Egypt, Qatar National Bank, the second largest private bank, and Arab African, to issue savings certificates for a period of one and a half years with a return of 22.5%, and in the case of monthly interest, the interest rate drops to 20%.
However, all these multiple issuances of savings certificates did not succeed in stopping the escalation of inflation rates during the months following their issuance, as the inflation rate issued by the Statistics Authority, which is officially responsible for calculating inflation, in February last year, that is, before the issuance of certificates, was 10%, but the inflation rate has been escalating since then until it reached 32.9% in February.
The same result was for the central bank's core inflation rate, which stood at 7.2% in February last year and continued to climb non-stop until it reached 40.3% in February.
It is fair to say that the economic conditions in the country were not stable, so that the impact of raising interest rates on bank deposits on inflation can be measured directly, as other factors intervened during that period that fueled the escalation of inflation, most notably the devaluation of the exchange rate of the pound against the dollar more than once during that period, which was reflected in the increase in the prices of imported goods, as well as on domestic prices that contain a foreign component.
As well as the lack of dollars from the inability of banks to finance imports, which resulted in the accumulation of imported goods in ports, which affected the ability of companies to produce due to the lack of raw materials and production requirements, which reduced the supply of goods in the markets and increased their prices consequently, as well as the ill-considered government intervention in pricing some goods, which led to their shortage in the markets, most notably rice, the main food for Egyptians.
Inflation is associated with a lack of supply, not an increase in demand
All those factors that led to the increase in inflation rates are still present, and therefore no one expects that the new high-interest savings certificates will be able to stop the escalation of inflation, as the problem of the shortage of dollars still dominates the economic scene, and even intensified, as central bank data indicated that the foreign currency deficit increased last February to $ 22.99 billion, including $ 9.2 billion deficit in the central bank and $ 13.8 billion deficit in the rest of the banks.
The problem of the accumulation of goods at ports because banks cannot arrange dollars for their release still exists, which led to a rise in the prices of some commodities, most notably poultry and meat, due to the difficulties of releasing fodder at the ports despite government statements to give priority to the release of food commodities at the ports.
The main reason for the expectation that raising interest rates on deposits to reduce inflation is the invalidity of the basic assumption that indicates that raising interest rates leads to individuals reducing their spending and directing those surpluses to savings in banks, as the main cause of Egyptian inflation is not the rush of consumers for goods and those who suffer from lack of purchasing power, but related to the shortage of goods.
The second thing is that the figures announced by banks on the sales of savings certificates are not effective, as the two government banks stated that they sold certificates worth EGP 755 billion, within two months after their launch on March 21, 2022, and it was natural that this outcome was reflected in the increase in deposits in banks by the same value during that period, but the data on the increase in deposits in banks, which includes the value of interest accumulated within them, was much lower.
Most Certificate Sales Deposit Replacement
In the three months preceding the issuance of savings certificates in March 2022, the average monthly increase in deposits by the household sector, which has the largest share of bank deposits, including interest, was EGP 49 billion, and during the three months from March to May, the average monthly increase in deposits for the household sector was EGP 82.5 billion.
This is not unusual for bankers who know that when state banks issue high-interest certificates of deposit, depositors in those banks transfer their savings vessels from the previous ones with a lower return to the new ones with the higher return, and others transfer their deposits from the lower-yielding banks to the banks with the highest yield certificates.
Thus, the bulk of the proceeds of the certificates announced by the banks come from the local banks themselves, and the remaining small part comes from outside the banks, which is also mostly coming from savings containers, most notably the postal savings book with the lowest return, and cash investment funds that give lower returns.
Therefore, I believe that when banks issue new savings certificates, they do not mainly target inflation, but rather aim to maintain their existing deposits, which represent the largest tributary of their resources after the widening of the difference between the interest rate and the inflation rate and the transformation of real interest into negative. In February, the official inflation rate was 32.9%, while their returns are much lower, ranging from 6.5% to 18% depending on the various savings pools.
The solution is in the availability of the dollar and the stability of its price
The impact of this shows that the proceeds of savings certificates in March, which reached a return of 18% at the time, were 755 billion pounds, while the proceeds of last January certificates were 470 billion pounds, despite the return on them reaching 25%.
This is not limited to bank deposits only, last June, the proceeds of sales of treasury bills to individuals were 22.3 billion pounds, when the yield on 91-day bills was 15.3%, but those sales to individuals continued to decline their balances during the following months, until they reached less than 10 billion pounds last January, although the interest on bills continued to rise until it reached 20.6% in January, as many tended to invest their money in assets that They achieve returns equivalent to the rate of inflation or more, which fixed returns cannot achieve, so some turned to gold and others to food commodities and other assets.
If many specialists believe that the rate of raising the interest on deposits recently made by the Central Bank of 2% to reach 18.25% is insufficient from the market point of view, and that it requires further interest hikes during the coming period, especially with the core inflation rate according to the Central Bank reaching 40.3%, and the majority believe that the real inflation rate is higher than official data states, but we believe that the matter will not be resolved through the interest rate alone, but rather Through the exchange rate more.
Markets are awaiting a new devaluation of the Egyptian pound exchange rate against the dollar, to compensate for the current gap between the official rate of about 31 pounds to the dollar and the black market price of 36 pounds, and the price in 12-month futures contracts reached 40 pounds, and many economic activities in the Egyptian markets deal with the black market price in pricing commodities such as gold, cars and other imported goods.
But more important than the expected devaluation of the exchange rate is the ability of banks after the reduction to provide dollars at the price they will announce, because if they cannot provide dollars to importers at the new price, they create justifications for the continuation of the black market, which means that further devaluation of the pound can be expected in the following months.