Mohamed Abdel-Aal, a prominent banking expert, has advised against the issuance of new savings certificates with yields matching or exceeding the 25% certificates nearing maturity. He argues that such a move is not advisable under the current economic conditions.
Abdel-Aal points out that higher interest rates would not benefit the national economy, banks, or individuals, nor would they aid in achieving inflation targets. He explains that an increase in certificate interest rates could compel banks to raise financing and lending rates for producers, who may then pass on the additional costs to consumers, thereby exacerbating inflationary pressures.
He also warns that designing new savings instruments could impose significant financial burdens on commercial banks’ budgets, particularly in light of Egypt’s downgraded sovereign credit rating, which directly impacts banks.
Abdel-Aal suggests that increasing returns for the household sector might entice investors and business owners to divest from their enterprises and temporarily invest in high-yield, tax-free, risk-free certificates.
Furthermore, he notes that interest rate hikes are unlikely without a preceding increase in the official rate by the Monetary Policy Committee. Such an increase could inflate treasury bill prices, escalating the local debt service burden and widening the budget deficit, as a 1% interest rate hike translates to an approximate EGP 30bn deficit increase.
Abdel-Aal reminds us that despite six interest rate increases totaling 11%—including 3% in the recent March and August meetings and 8% last year—Egypt’s inflation rate remains stubbornly high and off-target. Deposit rates have reached 19.25%, and lending rates 20.25%.
“Let us not forget that it seems that the mechanism of raising interest rates has lost its effect on containing Egypt’s stubborn inflation rate. Interest has been raised by a total of 11% six times, including 3% in the last March and August meetings, and 8% last year, reaching the level of 19.25% for deposits, and 20.25% for lending. Despite that, the inflation rate is still high and far from its set targets,” Abdel-Aal added.
He further explains that preferential interest rates offered by certain banks, while carrying substantial financial loads, could distort the banking system’s deposit structure.
Abdel-Aal advocates for a strategic shift towards incentives that attract foreign exchange inflows and deposits, proposing exceptional interest rates for dollar certificates and deposits. He suggests rates could be as high as 10% for one-year dollar certificates, with a minimum investment of $10,000 per certificate.
“In my opinion, the strategic direction now should be focused on giving preferential priority to incentives that attract foreign exchange inflows and deposits, and granting very special interest rates for dollar certificates and deposits. They may reach an uncompetitive level of at least 10% for dollar certificates for one year and a minimum of $10,000 per certificate,” Abdel-Aal said.
He emphasizes that neither individual clients, banks, nor the national economy stand to gain from increased interest rates or the issuance of new bonds or certificates in local currency at elevated interest rates.