Returns on treasury bills rise, negative impact on economic growth expected

Mohamed Ayyad
5 Min Read
CBE raised interest rates to combat inflation, which threatens inflation of the cost of government debt, given that the state is the largest borrower from the bank. (DNE Photo)
CBE raised interest rates to combat inflation, which threatens inflation of the cost of government debt, given that the state is the largest borrower from the bank.
(DNE Photo)

Prices jumped by 1% on returns on treasury bills for two different periods – 91 days and the other 273 days – following the Central Bank of Egypt’s (CBE) decision to raise interest rates by 1% on Thursday.

CBE raised interest rates to combat inflation, which threatens inflation of the cost of government debt, given that the state is the largest borrower from the bank.

The finance ministry raised bids on treasury bills worth a total EGP 5.5bn, with bids raised on EGP 2.5bn for 91 days and on EGP 3bn for 273 days. This marks the highest rise in interest rates since September 2013.

A report issued by the research unit at the Beltone Financial investment bank criticised the CBE’s move to raise domestic interest rates by 1% last Thursday, describing the decision as too speedy and unable to reduce inflation, indicating that it would have a negative impact on the growth of the economy.

According to Beltone, the CBE should have kept the interest rates unchanged, especially as inflationary pressures are caused by increased inflationary costs, whereas inflationary pressures from the demand side are still too low to warrant a change in the direction of monetary policy.

The average returns on the auction of bills for three months stands at 11.97%, versus 10.78% in the last auction, indicating a rising value of 1.2%, while bank IPOs covered 1.28 times the total value of the bids.

This is the highest return on the 91-day bills since July 2013, while the 273-day bills increased by about 1.1% to 12.2%, from an earlier 11.1%.

Hany Tawfiq, chairman of Egypt’s Direct Investment Association, stated: “The government must repair its economy in a tangible way, by keeping the budget deficit and public debt under control.” He added that “an increase on the returns on treasury bills will lead to inflation and an increase in the costs of government debt.”

The Ministry of Finance previously estimated that each cut in the interest rate of treasury bills and bonds by 1% provides EGP 10bn to the cost of servicing public debt, and as a result any increase threatens a burden worth EGP 10bn.

Egypt’s economy has been hit hard by the political turmoil of the past three years, which resulted in an exodus of tourists and investors from the country. The economy grew at a relatively small 1.2% during the first half of FY 2013/2014.

“Inflation in Egypt created by the government to increase fuel prices is what caused an increase in the cost of producing goods. Addressing comprehensive economic reform increases the supply of commodities and services – instead of raising the interest rates, which is used to fight the inflation resulting from an increase in cash supply, in order to increase savings and reduce demand,” said Tawfiq.

According to the debt schedule, the government is expected to borrow EGP 225bn through financial securities during the first quarter of the current fiscal year.

The Internal Debt Unit of the finance ministry manages EGP 1.7bn and works to keep the cost of government debt as low as possible.

Sources at the ministry said that the 1% interest rate increase will lead to a rise in the cost of additional public debt interest at a rate of EGP 5.5m per day or EGP 2bn annually, along with EGP 550m in daily principal interest for the public debt.

Interest allocations in the general state budget for FY 2014/2015 are valued at EGP 199bn.

The goal of the financial policy is to maintain the growth and operation rate by reducing interest prices and subsequently reducing the cost of public debt.

“I expect that the drop in interest rates on treasury bills during the upcoming bidding will not last long,” said a source from the finance ministry.

A number of businessmen fear that CBE’s decision to increase interest rates will lead to an increase in the costs of funding their projects through borrowing from banks, influencing investments.

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