08:43 PM
Sunday, November 20, 2022
I wrote – Manal Al-Masry:
Support for 5 low-interest initiatives has been transferred from the Central Bank of Egypt to 3 government agencies, thus for the first time in 3 years the Central Bank stopped subsidizing interest rates, according to what was published in the Official Gazette today.
Bankers, Masrawy spoke to, explained this decision as a response to the request of the International Monetary Fund, which agreed in principle last month to pump a loan to Egypt to eliminate interest rate distortions and as a regulatory and more transparent step for the Egyptian economy.
They added that the Central Bank’s cessation of supporting initiatives does not mean canceling them, stressing their continuation, but only interest support will be transferred to other government agencies, and banks will continue to implement them with the same previous instructions.
Today, the Official Gazette published the Prime Minister’s decision to stop subsidizing the Central Bank’s interest rate differential cost for 5 initiatives, which are the two real estate financing initiatives, with an annual interest rate on a decreasing basis of 8% for middle-income people, and 3% for the middle and low-income segment, the tourism initiative with an interest of 11%, and the vehicle replacement initiative. To work with dual fuels (fuel and gas) at a rate of 3%, and the initiative to encourage irrigation using modern means at a rate of zero%.
This decision means that the Central Bank will stop continuing to bear the cost of supporting 5 interest-bearing initiatives that are subsidized for different economic sectors, so that the Ministries of Finance, Housing, Utilities and Urban Communities, and the Tourism and Antiquities Support Fund (or the Ministry of Tourism and Antiquities) will replace it, which is one of the Monetary Fund’s demands. to reduce the burden on the Central Bank’s budget.
Sahar El-Damaty, former vice president of Banque Misr, said that stopping the Central Bank’s support for the initiatives means setting up a mechanism to reduce interest price distortions, as the implementing agencies represented in the banks continue to implement the work of the initiatives, but what will happen only is that other parties will bear the interest support.
She explained that this decision will not affect the continuation of initiatives to support the target groups and segments, but that it will be in a more organized way and included in the state’s general budget.
The central bank offers a number of initiatives with different subsidized interest rates, and the subsidized interest rates come in contrast to the central bank’s lending rate, which currently stands at 14.25%.
The new decision did not refer to the initiative to support industry with an interest rate of 8%, or the small and medium enterprises initiative with an interest rate of 5% annually on a decreasing basis.
Mohamed Badra, former CEO of a Gulf bank, told Masrawy that this decision is in response to the International Monetary Fund’s request to support the economic reform program.
On Thursday, October 27, Egypt announced the completion of the agreement with the International Monetary Fund at the expert level on a 46-month program of cooperation in economic reform, which includes financing of $3 billion, in addition to making available an additional $1 billion through the Fund’s Sustainability Fund, in addition to 5 Billions more from international partners.
Badra explained that the Central Bank’s cessation of supporting initiatives contributes to eliminating an imbalance in interest pricing in the market, and in the event that initiatives are launched, it will be limited to the Ministry of Finance, as it is the body entrusted with providing support to various parties, and this support is included in the final statement of finance.
A board member of a private bank, who preferred not to be named, told Masrawy that the transfer of support for initiatives from the Central Bank to the Ministry of Finance is one of the International Monetary Fund’s requests to reorganize and show a more transparent picture of the Egyptian economy.
He added that the new decision will reorganize these initiatives in terms of assigning the provision of the necessary support to them from the government agency associated with them and in accordance with their economic activities without affecting the transfer of support for these initiatives to their current clients or even in the future.
The central bank’s subsidized interest initiatives create pressure, along with other factors, on the central bank’s budget, incurring losses at the level of net business results due to its support for interest and paying the difference between the free and subsidized interest rate to banks.
The Central Bank’s losses during the last 5 years, from June 2018 to last June, exceeded 100 billion pounds, according to the Central Bank’s published financial statements.
Gamal Negm, Deputy Governor of the Central Bank, said earlier in 2020 to Masrawy that the initiatives launched by the Central Bank with subsidized interest are one of the reasons why the Central Bank incurred losses in its recent budgets.
But the cost of the monetary policy pursued by the Central Bank in order to achieve price stability in the market by collecting the money supply in the market to curb inflation, causes the bulk of these losses, according to Gamal Najm.