Central bank meeting, interest rates explained as Egypt cuts corners
By Farah Halime, Rebel Economy
Farouk al Okdah, Egypt’s central bank governor, will be chairing a monetary policy meeting this afternoon to decide on whether to change the country’s interest rates. It is just days before an International Monetary Fund delegation is due to arrive in Egypt to consider the country’s $4.8 billion loan request.
Egypt is likely to play it safe and maintain the benchmark deposit rate at 9.25% because of pressure on the domestic currency.
But what are the impacts of changing interest rates?
To explain clearly, Rebel Economy refers to a useful emailed note recently sent from the former head of the Egyptian Centre for Economic Studies, Magda Kandil:
“Growth is a big concern and inflationary pressures seem to have eased a bit lately. Raising the interest rate would not make sense in this environment as it would hamper efforts to revive the economy. On the other hand, lowering the interest rate could push up inflationary pressures and further increase depreciation pressures on the Egyptian pound. Hence, the best course is to be neutral before taking a bold action.”
And she sets out Egypt’s economic forecast for us:
“The economy remains weak, growth is not likely to exceed 2% in the past fiscal year. The outlook for the next fiscal year does not bode well given weakness in the economy and the increase in government spending on wages and salaries, interest payments on outstanding debt and the projected increase in food subsidies, notwithstanding efforts to contain fuel subsidies.”
“The private sector remains off track amidst growing concerns about strikes, high cost of borrowing, inability to access credit and weak domestic and maybe foreign demand. The risk of inflation remains high given the international reserves position which has stabilised somewhat lately but remains barely adequate to cover three months of imports. In the absence of a deal with the IMF and/or significant foreign inflows, the risk of depreciation of the pound remains and higher cost of imports could escalate inflationary pressures going forward.”
“Proactive policies should start on the fiscal side to contain growing deficit and reduce domestic borrowing. In addition to reaching out to the international community to boost confidence and catalyze concessional borrowing, the next government should have a vision to mobilise private sector activity by extending an umbrella of financial and institutional support and press ahead with the necessary structural reforms to grow jobs and increase confidence.”
Unfortunately Egypt is attempting to save money by cutting corners and enforcing plans that actually hurt the economy.
In the latest publicity stunt (because this is how these “plans” are coming across to the general public) the government has decided to shut shops and restaurants by 10pm to save energy, potentially costing Egypt $4.1 billion.
Reckless is one way of putting it, but more importantly, if Egypt really wants to conserve energy it might want to think about immediately raising the price of fuel for more expensive cars in the domestic market. Yes, that is likely to be met with criticism but ugly financial decisions must be made to pull Egypt out of its economic crisis.
A feature in the Financial Times on 18 October discusses how the government is nearing a decision on energy subsidies, having already accumulated up to $7 billion in arrears to international oil companies working in the country and owes another $1.5bn to $2bn for fuel imports.
But in a separate interview with the FT’s Heba Saleh, the country’s prime minister was less optimistic, saying, “what do we do and how quickly and how to ensure that the real poor are not impacted, this is a subject of discussion … I cannot give you a date [of when the cuts will start].”
A story was published in Bloomberg giving the first hints of what could be Egypt’s initial subsidy plans. The Egyptian oil minister Osama Kamel said Egypt plans energy-subsidy reforms in two phases and before the IMF team arrive.
The first phase is raising prices of 95 octane gas, which is used for luxury cars, fuel oil used in factories and electricity consumed by households will be raised in the next few days, and building up strategic supplies of fuel.
There is also talk of tying Egypt’s electricity network to those of neighbouring countries and talks on the country’s nuclear power project take place this week, but both of these have been discussed for many months.
The country is in desperate need to plug a natural gas shortage to supplement local power plants, steel and cement factories.
The oil ministry has revealed plans to import between 1 billion and 1.5 billion cubic feet of natural gas daily in an effort to plug this demand, Al-Ahram reported.
Egypt will soon announce details of an auction for the planned import of liquefied natural gas (LNG), a source told AhramOnline, adding ”Qatar and Algeria both welcome the notion of supplying Egypt with LNG.”
Turning a new loaf?
A nice feature by Egypt Independent’s economics editor Maggie Hyde on whether Egypt will tighten bread subsidies.
Subsidies already absorb about 28% of Egypt’s budget allocation of 476 billion Egyptian pounds ($79 billion). About two-thirds of that goes toward keeping fuel and energy prices low, and the rest is aimed at reducing food prices, particularly for wheat.
The feature critiques Egypt President Mohammed Morsy’s claim to have made an 80% improvement in the country’s subsidized bread services.
In light of the concerns over a repetition of the 1977 bread riots, the article talks about the government’s attempt to appease the public and simultaneously make subtle changes to the wheat subsidy system.
Really, the heart of Egypt’s economic problems lies in its unsustainable energy subsidies, which is having a severe impact on the country’s domestic and external debt (don’t forget that “external debt” also includes the billions of dollars owed to foreign oil companies and banks that have helped Egypt fund its energy imports and exploration).
Is the Muslim Brotherhood really that different to the Mubarak regime? At the moment, it appears the two political forces have more in common than not, with a revival of Mubarak-era mega projects and a very limited break out of the economic policies used in the former regime.
A business association founded by Hassan Malek, a financier for Egypt’s new Islamist rulers says it can democratise an economy long dominated by associates of ousted leader Hosni Mubarak, but sceptics fear the emergence of just another clique.
Egypt’s largest steel producer, Ezz Steel, reported a 16% drop in net profit in the second quarter, as the company grappled with persistent economic weakness since last year’s uprising.
Earlier this month, Ahmed Ezz, former chairman of Ezz Steel, was sentenced to seven years in prison and fined LE19.3 billion ($3.1bn) after being found guilty of corruption by a Cairo court, so that can’t bode well for the company’s image. Last year, he was sentenced to 10 years in prison also on graft charges and fined.
Farah is a business journalist and founder of Rebel Economy, a blog focused on how regional economies are rebuilding after the Arab Spring.