Egypt to bank on lower rates for durable growth in 2021

Egypt to bank on lower rates for durable growth in 2021

 

By Ahmed Kamel

As direct investment will be the magical wand to accelerate economic growth, there is no ideal option, but to slash interest rates in the coming months. Undoubtedly, a rate cut would decrease the cost of direct investment. By all means, the local business community will praise such a move.

However, from an economic point of view, any probable rate cuts should be timely determined according to the global and domestic circumstances. The outlook of the monetary policy in 2021 will be set by a combination of determinants, particularly, the durability of economic recovery on both the domestic and global levels.

In 2020, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) embarked on monetary easing to incentivize public and private investments. The general trend has been monetary easing for boosting direct investment and activating bank credit to the business community.

Currently, the overnight deposit and lending rates stand at 8.25 and 9.25 per cent respectively. The MPC is scheduled to decide on rates on December 24. Most likely, the MPC will keep the rates on hold in its last meeting this year.

In its November meeting, the MPC cut the overnight interest rates by 50 basis points, or 0.5 per cent.

Further rate cuts will be likely in the first quarter in 2021. The policymakers may cut overnight interest rates by up to two per cent in 2021 to revive the nation’s credit market, on the one hand, and decrease the cost of the state’s internal debt servicing. 

Lower overnight interest rates ultimately ease pressures on the public finances as yields on the state’s domestic debt instruments decline. The nation’s public debt fell to 87 per cent of the gross domestic product (GDP) in June 2020, down from 90.2 per cent in June 2019, according to data from the Finance Ministry.

The public debt to GDP ratio reached as high as 108 per cent in June 2017.

In the same vein, lower rates will also ease pressures on the local banks to offer competitive credit to the private sector. Decreased overnight rates slash the cost of money, as banks will pay lower yields on deposits.

Deposits at the local bank stood at LE4.898 trillion (around $314 billion) in August, according to CBE data. Bank loans totaled LE2.487 trillion in August.

An easing monetary policy is simply aimed at the narrowing of government and local financing needs to maintain sustained economic growth in the medium term. From a market-orientated perspective, weaker inflationary pressures also foster the potential of further rate cuts.

The objective is to boost aggregate demand, on the government, domestic and corporate levels, by decreased interest rates to increase public and private-sector investments. The ultimate goal will be striking a balance between supply and demand for paving the way for direct investment to push the economy ahead.