The International Monetary Fund (IMF) called on the Central Bank of Egypt (CBE) to cancel all low-interest initiatives — such as loans to small and medium enterprises, the tourism sector, and real estate financing — stressing the need for unified interest rates in the banking market, according to three government sources that spoke toBloomberg Asharq.
Egypt is currently in negotiations with the IMF on a new loan in order to keep the gains of the first wave of the country’s economic reforms and meet the country’s financial needs in response to the global economic challenges amid the ongoing Russian-UkrainianWar.
Egypt submitted the request for the loan in March. This is the first time that negotiations have dragged on to this extent without announcing a final agreement.
Meanwhile, Prime Minister Mostafa Madbouly said on Monday that the government is in the final stage of the negotiations. This came during the PM’s participation in the third edition of Logos Coptic Youths Forum.
Daily News Egypt (DNE) dug further to find out the reasons behind the IMF’s demands, whether these measures would negatively hit all economic sectors, and whether the government would really cancel these initiatives.
Economist, and American University in Cairo adjunct professor, Hany Genena explained to DNE the philosophy behind the IMF’sdemands, stating that the multiple interest rates — including the subsidised interest rate — disrupt the effectiveness of monetary policy
He also mentioned that the IMF is very interested in monetary policy with regard to interest rates and the exchange rate, so while having multiple interest rates, we have disrupted one of the mechanisms by which any central bank controls inflation and lending rates.
Notably, during the last six years, Egypt launched a number of initiatives with low-interest financing, such as financing the tourism sector with a subsidised interest rate of up to 8%, small projects with an interest rate of 5%, medium-sized projects and the industrial and agricultural sector at an interest rate of 8%, and real estate financing activities with an interest rate ranging between 3% for low-income housing and 8% for middle-income housing.
On Thursday, the Monetary Policy Committee (MPC) decided to keep the CBE overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 11.25%, 12.25%, and 11.75%, respectively. The discount rate was also kept unchanged at 11.75%.
The second reason that Genena discussed was that the IMF believe that the subsides should be given from one institutionin Egypt —the Ministry of Finance — and this subsidy and its amount should be under one item in the state’s general budget, so that the IMF and the state could see the losses resulting from this subsidy and compensate or cover it.
He further explained that in the case of the low-interest initiatives in Egypt, they are subsidised by the CBE, adding that the interest should be in line with the interest rate corridor.So, when a commercial bank lends at 5%, the CBE compensates it in one way or another, or the commercial bankbears the lending at a lower rate.
Low-interest initiatives are not considered subsidised interests
For his part, SherifAl-Diwany —former senior director andhead of MENA at the World Economic Forum —told DNE that these low-interest-rate initiatives are not considered subsidised, because there is no direct subsidy for the interest in the general budget,as the state’s general budget does not bear the cost of the low-interest rate.
He also stressed that there will be no reason to cancel it, doubting that the IMF is requesting to axe it.
Moreover, hebelieves that these initiatives are being implemented in a system that respects the banking sector and does notimpact the CBE or the statenegatively.
Al-Diwanythen explained that central banks around the world require that any bank operating in the market allocates a certain reserve equal to 25% of its total money in the account of the central bank without interests. However, the CBE removed this condition when lending with low interest for the industrial sector, meaning that money was being loaned out at no cost.
“Imagine if you are an owner of a commercial bank that operates with EGP 100bn,and you have to put EGP25bn of them in the CBE’s account without interest, then the CBE suggested that you lend EGP10bn to the industrial sector and it will cancel the 25% condition.In that case, there is no cost for lowinterest rate lending,” he said.
The IMF’s philosophy
Talking about the Philosophy of the IMF, Genena said that Egypt had an agreement with the IMF around 1990 and 1991.Before that, in the 80’s, there were three interest rates — one for the agricultural sector, one for the industrial, and one forservices — in which the interest for the agricultural sector was the lowest, the industrial was average, and theservices sector was the highest.
Genena said that the IMF demanded at the time to have a unified interest rate, so this is not the first time to see this thinking or philosophy from the IMF.
He also mentioned that currently, Egypt has unified the customs USD and the bank USD.
Should these demands be met?
Genena affirmed that a lot of people in the industrial sector are benefiting from the 5% and 8% interest rates, so the government will have to negotiate some more with the IMFin order to reach an agreement on the gradual cancellation of the low-interest initiatives.
“The interest rates will increase during the next six months, so if the government cancelled the initiatives — and the exchange price of the USD rises — unfortunately, the industrial sector will be done for,” he warned.
He added that the Egyptian government will have to reach an agreement with the IMF in whichitmaintains the initiatives and fulfil the other requirements.
“After increasing, the interest rates will eventually gradually decline, and then by next year, all sectors will benefit from the low-interest rates. At which point, the CBE can cancel the low-interest initiatives without destabilising the sector, since there would be a viable average interest rate to fall back on.”
Concurring with Genena, Al-Diwany explained that these initiatives support the industrial sector in Egypt; having them cancelled would cause a great shock in the sector and negatively impact investment and growth rates in the country.