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IF Insights: Central Bank of Egypt’s prudent monetary policies lead to stability & growth

IFM_Central Bank Of Egypt
Establishing itself in January 1961, the Central Bank of Egypt replaced the National Bank of Egypt in note issuance and central banking operations

The prudent handling of monetary policy by the Central Bank of Egypt (CBE), encompassing interest rates and money markets, is a vital factor in preserving economic stability. Its main goal is to keep excessive inflation under control and bring down the cost of goods and services. This becomes more important when there are geopolitical dangers, foreign shocks, and difficult economic situations.

Several actions taken in tandem with state agencies and economic working groups, as well as the agreements CBE inked with international economic and financial organisations, demonstrate the impact it has on price reduction, market stability, and inflation control.

Establishing itself in January 1961, the Central Bank of Egypt (CBE) replaced the National Bank of Egypt in note issuance and central banking operations. Assuming the authority and powers granted by Law No. 88 for 2003 and Presidential Decree No. 64 for 2004, which issued the Central Bank Statute, the CBE is an independent public legal entity.

We may list a few of the most significant ones in this regard, beginning with the liberalisation of exchange rates on March 7. Since the decision was made, CBE has been monitoring the foreign exchange market to make sure there are enough balances available in the interbank market and to pay for and settle all outstanding documentary credits that need to be collected at official prices.

As a result, outstanding requests for foreign exchange have vanished, enabling the ultimate discharge of production needs, raw materials, and strategic commodities that had been held up at Egyptian ports.

Naturally, this action dealt a triple blow, expelling the leading demand components from the parallel market and precipitating a decline in the USD rate. However, products eventually became available, and their costs decreased quite gradually.

However, to address high inflation and contain it so that it gradually approaches its targets, CBE adopted a very restrictive interim monetary policy regarding the interest rate, raising it by 800 basis points during the first quarter of 2024 in tandem with the announcement of liberalising the exchange rate.

In this manner, it was able to lower prices and regulate the rate of inflation. At low rates of return, CBE then proceeded to devote 25% of the financing portfolio of the banking system to small and medium-sized financing activities. As a result, both the availability and pricing of those industries’ products in the marketplace decreased.

The World Bank has disclosed that it will provide the Egyptian government with USD 700 million in Development Policy Financing (DPF) as part of the USD 6 billion overall support programme that the global financial institution announced in March 2024. This USD 700 million grant is the first step of a three-phase initiative that will get financial support over three years.

This DPF, which goes by the name “Generating Resilience, Opportunities, and Welfare for a Thriving Egypt,” aims to solve Egypt’s immediate economic problems while simultaneously setting the groundwork for long-term structural reforms to the political system.

The aforementioned changes aim to enhance the involvement of the private sector, strengthen macroeconomic and fiscal resilience, and support Egypt’s green transition by augmenting renewable energy production and elevating efficiency in the energy, water, and sanitation domains.

The overall goal of the USD 6 billion World Bank financial support programme is to promote sustainable climate resilience, improve economic management in the nation, and increase employment in the private sector.

We also understand how CBE authorises state-owned banking system units to issue extraordinary rate of return savings certificates to both compensate household savers for the high rate of inflation and enable those banks to absorb liquidity and lower demand to control inflation.

Additionally, CBE works with the Ministry of Finance to execute its new financing strategy for agricultural and industrial activities through the banking system’s units. Due to the growth in volume and financing options for this kind of business, this significantly lowers the cost of goods for residents.

To control the money supply and remove excess liquidity from the banking system units, the CBE keeps interfering in open market mechanisms. Additionally, it has adjusted the weekly deposit mechanism.

The goal of all of this is to control the money supply and the rate of inflation by ensuring price stability, accurate control over the liquidity rate, and the quantity of payments made in the market.

Concurrently, CBE keeps enacting measures to encourage investment, boost economic expansion, and create jobs. Alongside these goals, it is working with international financial institutions to successfully finish and implement economic and structural reform initiatives that have the potential to boost overall economic activity, reduce commodity prices, and improve production.

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