The recent decision of the Central Bank of Egypt (CBE) to slash interest rates by 1.5 percent is a step in the right direction to reduce the country’s domestic debt and encourage investment, said Egyptian economic experts.
CBE has recently slashed deposit, lending and main operation rates by 1.5 percent, reducing them to 14.25 percent, 15.25 percent and 14.75 percent respectively.
These rates once grew as high as 20 percent following the country’s full liberalization of its local currency’s exchange rate in November 2016 as part of a three-year economic reform plan.
“This is a positive step that reduces the volume of local debt by decreasing the debt service represented in the interest rate paid by the government for domestically borrowing in the form of treasury bills,” Mohamed al-Shemy, Egyptian banking expert and economics professor emeritus, told Xinhua.
He explained that treasury bills used for the government’s domestic borrowing are linked with the interest rates that have recently been slashed by 1.5 percent.
Egypt’s foreign exchange (forex) reserves rose to 44.92 billion U.S. dollars by the end of July 2019, according to the CBE.
Shemy described Egypt’s credit of forex reserves as “safe,” attributing its rise to the improvement of the country’s sources of foreign currency, including the Suez Canal traffic fees, tourism, exportation and the remittances of Egyptian expatriates.
“Since the interest rate has decreased and the amount of forex reserves is safe, this should positively reflect on the prices of commodities in the local market,” said the banking expert.
He added that the interest rates affect those investors whose businesses are based on domestic borrowing, so when the interest rates are decreased, it will attract more investors to the Egyptian market.
“The interest rate reduction also reduces the cost for borrowing investors and the cost of their products, so it should both lure investors and reduce prices,” Shemy pointed out.
Egypt’s foreign debt rose to 106.2 billion dollars by the end of March 2019, compared to 88.2 billion dollars in the same period last year, according to CBE data released in August. Meanwhile, the domestic debt currently exceeds 4 trillion Egyptian pounds (about 248 billion dollars).
Ibrahim Nawwar, an economic expert and former adviser to the minister of industry and foreign trade, said that the 1.5-percent interest rate reduction is expected to reduce the public debt service and also help the government reduce the budget deficit of the ongoing fiscal year.
“The positive move is also likely to encourage investment, open room for further industry and exportation, push forward the stagnant real estate market, create new job opportunities and increase production capacity,” Nawwar told Xinhua.
The expert explained that the government has already managed to reduce the debt service by more than 2 percent before the CBE decision to slash interest rates, yet the recent move will maximize the debt service reduction.
Supported by a 12-billion-dollar loan from the International Monetary Fund, Egypt started a three-year austerity-based economic reform program in November 2016, including local currency devaluation, fuel and energy subsidy cuts and introduction of value-added tax.
Despite consequent price hikes, the reform program achieved positive results that reflected on the country’s growth rate, which hit 5.6 percent during the 2018/19 fiscal year that ended in late June, according to Egypt’s Finance Minister Mohamed Maait.
“Generally, the CBE reduction of interest rates is a right decision and a step in the right direction,” Nawwar said, stressing that the success of the move requires increasing investment in both the public and the private sectors, broadening production capacities and boosting exportation.