7/4/2023–|Last updated: 4/7/202301:08 PM (Makkah)
The Egyptian banking system continued the policy of raising the interest rate in an effort to reduce the current high inflation rates, as the Central Bank raised the interest rate by 2% on March 30, after raising the interest 4 times during the past year, with a total of 8%.
The CBE also prompted the two largest government banks in terms of the ability to attract deposits, namely Al-Ahly of Egypt and Misr, 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 by 22% in the first year, then by 18% in the second year, then by 16% in the third year, i.e. at an annual average over the three years of 18.66%.
The issuance of the new certificates by the two government banks is an extension of their issuance of savings certificates with a return of 18% In March 2022 for a year, the subscription continued for two months, then savings certificates with a return of 17.25% were issued last October, then savings certificates with a return of 25% were issued in early January for a year. The return is disbursed at the end of the period, or with a return 22.5% in the case of paying the return monthly and continued subscription until the end of the month.
Factors disrupting the effect of interest on inflation
These issuances were accompanied by the establishment of some private banks, most notably the Commercial International Bank, the largest private bank in Egypt. and Qatar National The second largest private bank, and the African Arab, issuing savings certificates for a period of one and a half years, with a return of 22.5%, and in the event that the return is paid monthly, the interest 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 statistical agency officially responsible for calculating inflation, in February of last year, that is, before issuing the certificates, was 10%, but the rate Inflation has been rising since then, reaching 32.9% in February.
The same result was for the core inflation rate issued by the Central Bank, which had reached 7.2% in February of last year, and it continued to rise unceasingly 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 on bank deposits on inflation could be measured directly, as other factors intervened during that period that fueled the escalation of inflation, most notably decreasing 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 the prices of domestic goods that contain a foreign component.
Likewise, what resulted from the dollar shortage was the inability of banks to finance imports, which resulted in the accumulation of imported goods in the 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 accordingly, as well as inappropriate government intervention. The deliberate price of some commodities, which led to a shortage in the markets, most notably rice, the main food of the Egyptians.
Inflation is associated with a decrease in supply, not an increase in demand
All of these factors that led to an increase in inflation rates are still present, and therefore no one expects that the new savings certificates with high interest will be able to stop the escalation of inflation. The problem of dollar shortage still dominates the economic scene, and has even intensified, as central bank data indicated an increase in the deficit. In foreign currencies last February, it reached $22.99 billion, of which $9.2 billion was a deficit in the Central Bank and a $13.8 billion deficit in other banks.
The problem of the accumulation of commodities in the ports because the banks were unable to obtain the dollar for their release still exists, which led to an increase in the prices of some commodities, most notably poultry and meat, due to the difficulties in releasing fodder in the ports, despite government statements to give priority to the release of food commodities in the ports.
The main reason for expecting the ineffectiveness of raising interest on deposits to reduce inflation is the invalidity of the basic assumption that indicates that raising interest leads to individuals reducing their spending and directing those surpluses to saving in banks, as the main cause of Egyptian inflation is not consumer demand for goods and those who suffer from lack of capacity Purchasing, but related to the shortage of goods.
The second matter is that the figures announced by banks for sales of savings certificates are ineffective, as the two government banks stated that they sold certificates worth 755 billion pounds, within two months after they were issued on March 21, 2022, and it was normal for that outcome to be reflected in the increase in deposits in banks by the same value during During that period, however, the data on the increase in deposits in banks, which includes the value of interest accumulated within them, was much less than that.
Most sales certificates replace deposits
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, amounted to 49 billion pounds, and during the three months from March to May, the average monthly increase was In deposits for the family sector, 82.5 billion pounds.
This is not strange for bankers who know that when government banks offer certificates of deposit with high interest, depositors in those banks transfer their savings containers from previous vessels with lower returns to new ones with higher returns, and others transfer their deposits from banks with lower returns to The banks with the highest yield certificates.
Thus, the bulk of the proceeds of the certificates announced by the banks comes from the local banks themselves, and a small part remains coming from outside the banks, and it is also mostly coming from savings vessels, most notably the mail savings book with the lowest return, and cash investment funds that give lower returns.
That is why I see that banks, when offering new savings certificates, do not target inflation mainly, but rather aim to maintain their existing deposits, which represent the largest source of their resources after the widening of the difference between the interest rate and the rate of inflation and the transformation of the real interest into negative. Last February, the official inflation rate was 32.9%, while the returns they receive are much lower, ranging from 6.5% to 18%, according to the various savings vessels.
The solution is in the availability of the dollar and the stability of its price
Likewise, the emergence of a competitor for bank deposits represented in speculation on the dollar and achieving returns from that that exceed those of banks, and the effect of this shows that the proceeds of savings certificates in March, on which the return reached 18% at the time, was 755 billion pounds, while the outcome of last January certificates was 470 One billion pounds, despite the revenue have 25%.
This was not limited to bank deposits only. Last June, the proceeds of sales of treasury bills to individuals amounted to 22.3 billion pounds, when the return on the bills for a period of 91 days was 15.3%. 10 billion pounds last January, despite the interest on bills continuing to rise until it reached 20.6% last January, as many tended to invest their money in assets that bring them returns equal to the inflation rate or more, which fixed returns cannot achieve. That is why some turned to gold and others to food commodities and other assets.
And if many specialists believe that the interest rate raised on deposits that the Central Bank recently made, amounting to 2%, to reach 18.25% It is not enough from the market point of view, and that the matter requires further interest rate hikes during the coming period, especially with the core inflation rate according to the Central Bank reaching 40.3%, and the majority’s belief that the real inflation rate is higher than what the official data mentions, but we see that the matter will not be resolved. Not only through the interest rate, but more so through the exchange rate.
The markets are anticipating a new decrease in the exchange rate of the Egyptian pound against the dollar, to compensate for the current gap between the official rate of about 31 pounds per dollar and the black market price of 36 pounds, and the price in futures contracts for a period of 12 months reached 40 pounds, and many economic activities in the Egyptian markets dealt with the black market price. In pricing commodities such as gold, cars and other imported commodities.
However, more important than the expected devaluation of the exchange rate is the ability of the banks, after the devaluation, to provide the dollar at the price that they will announce, because if they are unable to provide the dollar to importers at the new price, then they create justifications for the continuation of the black market, which means the possibility of anticipating further devaluation of the pound in the following months.