Interest rates: How have Egyptians been affected by reducing them more...

• Ahmad Omar
• Cairo

After nearly thirty years working for an Egyptian business sector company, Essam was forced into early retirement in light of the restructuring of the public sector and the business sector that is currently taking place in Egypt.

Essam’s source of income since his retirement in 2016 is his monthly pension, in addition to the proceeds of his end-of-service bonus, which he deposited as a savings certificate in a government bank.

Essam told the BBC: “The 20 percent certificates provided not bad revenue, enabling me to cope with the increasing costs of life every day. After those certificates stopped, I bought a new certificate last year with a 17 percent return. I was able to adapt to the shortage that followed. Low yield, but the certificate will expire next year, and I do not know how I will deal at that time.

About 11 million people in Egypt receive government pensions, and most of them do not have other sources of income.

Last month, the Central Bank of Egypt announced a reduction in interest rates to 9.75 percent for lending and 8.75 percent for deposit, making this the twelfth time that the Central Bank has moved the interest rate since the liberalization of the Egyptian pound exchange rate in November 2016.

The decision to reduce interest was accompanied by the announcement by a number of government banks to cancel the savings certificates with high returns. Banque Misr and Al-Ahly announced the cancellation of investment certificates with a return of 15 percent, which were giving the highest return in Egypt.

The Egyptian banks had started issuing these certificates since 2016, with interest sometimes reaching 20 percent before they began to gradually reduce interest, so that the highest interest rate offered now is less than 12.5 percent.

The central bank attributes the rate cut decision to the easing of inflationary pressures. As the annual rate of inflation fell to a record 3.4 percent in August of this year, the second lowest rate in nearly fourteen years.

But Essam believes that these numbers have nothing to do with reality. He tells the BBC: “The government says that the economy is progressing, and officials always come out with promising numbers. But I do not see any of these indicators in the stores from which I buy home supplies, nor do I see them in my child’s school fees, and all I see is increasing prices and new taxes every day. ”

Economist Medhat Nafeh says that the first victim of the cancellation of these certificates and the reduction of interest rates will be the family sector and small depositors such as Essam.

Nafeh added to the BBC: “The solutions for the family sector to save the value of money are very limited, especially in light of the high prices of real estate and gold, which were considered the most important investment vehicles for this sector.”

As for Numan Khaled, one of the economists who expected the interest rate cut, he believes that in this case, investment funds will become the most effective solution for the average citizen wishing to preserve the value of his savings.

Investment funds are known as a pool of money that is co-owned by a group of investors, and is managed by professionals in the field of financial investment, who make decisions to buy or sell a group of securities, such as bonds and stocks.

Khaled added to the BBC: “Investment funds are able to provide a greater return to the family sector compared to current interest rates, and they will also contribute to revitalizing the stock market, especially since these funds still offer real interest higher than the declared inflation rates.”

However, a high-ranking source in the Egyptian banking sector, who refused to be named, told the BBC that the demand for investment in these funds is not great, justifying that the profitability of these funds in the retail sector in banks, which pushes bank workers to promote other products at the expense of investment funds.

According to the Central Bank of Egypt, the family sector acquired 81.9 percent of the total deposits of banks operating in the Egyptian market by the end of March 2020.

Essam, who was “forced” to retire early, as he put it, is now looking for a new job opportunity to help him regain what he lost from his monthly income, which some believe may become relatively easier in the near future as the interest on lending reduces.

Alaa Tamer, an Egyptian businessman, believes that reducing the interest rate on borrowing would contribute to revitalizing the Egyptian economy.

“When the cost of borrowing decreases, this will encourage investors to obtain loans from banks to pump them in the form of investment projects, which will create new job opportunities and an activity situation in the Egyptian economy, especially in the service fields,” Tamer told the BBC.

For his part, Medhat Nafie, who previously held the position of chairman of a holding company, believes that the huge interest on certificates was enough to withdraw liquidity from the market.

Nafeh says: “20 percent interest on certificates is greater than any net profit that any commercial enterprise might realize. In light of these huge returns, there will be no justification for any investor to venture into any economic activity.

The Central Bank of Egypt announced that the total credit facilities granted by banks increased during the first half of 2020 by 16 percent over the same period last year.

In addition to the direct effects on the Egyptian citizen as an investor or as a depositor, many people fear that lowering the interest rates on deposits and lending will cause “hot money” to leave the Egyptian market, which may affect the Egyptian economy in general.

And “hot money” refers to foreign investments in government debt instruments and stocks on the stock exchange. It is described as hot due to the rapid entry and exit of the market in search of the largest profit.

But Numan Khaled, a macroeconomic analyst at Arqaam Capital, says this fear is misplaced.

Khaled says, “Egypt is still the best option for those funds, even with low interest rates. Our competitors, such as Turkey or Nigeria, do not enjoy the stability and stability that the Egyptian market currently enjoys.”

Egypt announced a few days ago that foreign exchange reserves had risen to 38.425 billion dollars at the end of last September, coming from the level of 38.366 billion dollars at the end of August, and the Egyptian reserves had exceeded forty-five billion dollars before the outbreak of the Corona epidemic last March.

Economic analyst Alaa Abdel-Halim believes that the reasons for moving the interest rate are varied, but at the present time moving the interest rate is in the interest of the government in the first place, as it is the largest debtor in the market.

Abdel Halim says: “The cost of borrowing now has decreased to lower levels than it was before the decision to liberalize the exchange rate. This significant reduction in the interest on borrowing will reflect positively on the state budget and reduce the deficit, and it will also contribute to reducing the debt service bill.”

In the budget for the fiscal year 20/21, the Egyptian government aims for the total deficit to reach 6.3 percent of the gross domestic product, while the estimates of public debt service benefits to be paid for the same fiscal year are about 33 percent of the total expenditures in the draft budget.

Noman Khaled believes that the inflation rates have become less than the target by the Central Bank, which makes the possibility of reducing the interest again in the future.

Khaled told the BBC: “High inflation rates are not necessarily a bad thing. Working to return liquidity to the market again to raise inflation rates to targeted rates is healthy for the economy in general.”

The Egyptian economy is considered one of the few economies in the region that managed to achieve a growth of two percent during the first quarter of the fiscal year 20/21, according to the estimation of many international bodies and agencies. The European Bank for Reconstruction and Development expected growth in Egypt to reach 3.3 percent in the fiscal year 2020/21, and the same bank also expected the growth rate to rebound to 5 percent in the next fiscal year.