Rates have not changed for the third time since the African country’s apex bank signed an USD 8 billion financial support agreement with the International Monetary Fund (IMF) on March 6, when it hiked rates by 600 basis points (bps).

One analyst predicted a 100 basis point drop in rates, while the other fifteen analysts surveyed by Reuters recently predicted that rates would stay unchanged.

“With the gradual easing of previous shocks, inflationary pressures continued to subside, as annual headline and core inflation edged downward for the fifth consecutive month,” the central bank’s monetary policy committee (MPC) wrote in a statement accompanying the decision.

The conflict in Gaza, Russia’s invasion of Ukraine, and the coronavirus have all taken a toll on Egypt’s already fragile economy. For the first time since January 2022, the real interest rate increased as inflation fell to 25.7% in July 2024.

After reaching an all-time high of 38% in September, inflation started to decline gradually. In the coming days, August inflation data is expected.

“Domestically, real GDP growth softened to 2.2% in Q1 2024 compared to 2.3% in Q4 2023. The softening is driven by declining public contribution to economic activity due to the impact of Red Sea maritime trade disruption on the service sector,” the MPC said further.

According to the MPC, inflation would sharply drop in the first quarter of 2025 and economic growth would progressively rebound in the fiscal year that started on July 1.

“The gradual unwinding of food inflation along with the improvement of inflation expectations suggest that inflation is currently on a downward trajectory,” it said.

Talking about Egypt’s fight against inflation, the phenomenon is forecast to have declined for a sixth month in August 2024, helped by a favourable base effect. However, some analysts say it is likely to have increased month on month after a series of government-led price hikes.

One of the conditions of the financial support pact signed between Egypt and the IMF was to make the African nation increase domestic prices. The government as a result has raised the cost of many subsidised products to battle a budget deficit that hit 505 billion Egyptian pounds (USD 10.3 billion) in the fiscal year that ended on June 30.

According to the forecasts of 19 analysts, annual urban consumer inflation slowed to a median of 25.1% in August from 25.7% in July.

“We expect urban inflation to decelerate to 24.9% y-o-y for August on a favourable base effect. However, we anticipate a 1.0% m-o-m increase on the recent energy and transportation cost hikes at the beginning of August,” said Heba Mounir of HC Securities, while interacting with Reuters.

Naeem Holding, which forecast annual headline inflation of 24.8%, predicted an increase of 1.24% month on month from July. This was due to higher summer produce prices, fuel hikes of 10-15% near the end of July, a 25-33% jump in metro tickets at the beginning of August and a 21-31% increase in electricity tariffs.

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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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The program, according to the AMF, aims to boost economic inclusion, increase payment system efficiency, and fortify the regulatory environment in the banking and financial industries.

It hopes to do this by broadening the application of financial technologies and enhancing consumer protection.

Hassan Abdalla, the governor of the Central Bank of Egypt, and Abdulrahman Al-Hamidy, the director general of the AMF, signed the agreement on July 25.

Abdalla emphasized that the fund helps Arab nations face sectoral problems and maintain economic and financial stability.

Al-Hamidy appreciated the efforts made by the Egyptian administration to carry out structural and economic changes. He claimed that these changes helped the economy grow while also enabling it to survive in domestic and international markets.

Additionally, he emphasized that the Arab Monetary Fund is eager to keep up their “fruitful collaboration” with the Egyptian government in order to assist that nation in efficiently addressing its various problems.

The 22-member AMF said in a press release that it is now reviewing financial requests from other member nations. It further stated that in order to give assistance as soon as possible, the fund is processing the petitions using “expeditious procedures.”

The method would assist the borrowing member countries in meeting their funding needs and strengthening their financial positions, according to the press release.

The Arab Monetary Fund also stated that it provides consultation on economic, financial, and development concerns and encourages policy debate among its member governments. Additionally, it offers the member states technical guidance on monetary, fiscal, and financial issues.

The statement also mentioned that the Arab Monetary Fund provides training for government employees in member nations through its Institute for Training and Capacity Building.

According to a Morgan Stanley analysis published in March, Egypt’s needs for external financing are impeding its economic growth and could limit its medium-term expansion.

According to the analysis, Egypt has good prospects for medium-term growth, but the significant external finance requirements will have an impact on the macroeconomic outlook.

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In June 2019, Egypt’s external debts reached $108.699 billion, according to the World Bank data. The country’s external debt spiked by $12.6 billion during the first nine months of 2019. 

The Egyptian Government has allocated $58.86 billion to foreign debt, $27.648 billion to the Central Bank of Egypt, $9.2 billion to banks operating in Egypt and $13.6 billion to the remaining sectors. 

The World Bank estimated Egypt’s volume of long-debt to be more than $98.3 billion. This is equal to 89.9 percent of the total external debt stock and the remaining $1 billion is in the form of short-term debt. 

The Central Bank of Egypt data showed that the country has to pay $1.694 billion and $5.167 billion during the first half and second half of 2020 as debts to Arab countries. It will have to pay $681 million in the first half of 2021 to those countries, a local media report said. 

The country’s finance ministry is planning a debt-to-GDP ratio of 77.5 percent by 2020. The  debt-to-GDP ratio was reduced from 108 percent in 2017 to 98 percent in 2018 and to 90.8 percent in 2019, a local media report said. 

Egypt lowering its debt burden would ensure more accumulation of funds for education and healthcare. Also, it would help to make rapid economic changes and increase competitiveness. Previously, Governor of Central Bank of Egypt Tarek Amer at the International Finance Institute said there are no risks rising from Egypt’s external debt. 

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The act that was forwarded to Egypt’s House of Representatives this week will be evaluated by impromptu legislative panels, and then discussed completely.

The recommended law pertains to the operations of the central bank and monitors the coordination between the bank and the concerned authorities responsible for overseeing the financial domain.

The latest bill is a part of a larger economic scheme that endeavours to facilitate Egypt in generating jobs, fostering investments and fulfilling its development activities.

The salient aim of the law is to shield the banking system during times of emergencies, being abreast with the latest changes occurring in the financial domain, as well as improving the operations of the CBE and other banks functioning in the country.

As far as digital payments and financial technologies are concerned, the draft law seeks to implement regulations governing them.

Apart from these, the act also frames policies on impartial competition, thwart domination and safeguarding the rights of the banking customers.

Tarek Amer, the CBE Governor, had indicated that forming a new banking policy comes under the ambit of legislative reforms created by the government to handle rapid financial developments across the globe.

The draft bill is conceptualised according to the guidelines and inputs by leading banking veterans across the globe. It also takes into account the suggestions put forward by other banks and entities to the CBE in this aspect.

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Bank Audi is one of the major players in Egypt’s banking sector. It showed a total retail finance of EGP 7.3 billion at the end of September 2019, accounting for 26 percent of the total loans and facilities portfolio. This portfolio recorded EGP 28.1 billion during the same period. Currently, Bank Audi’s outstanding loans to SMEs stands at EGP 3 billion. 

The Central Bank of Egypt’s five percent SME lending  initiative was launched in 2015. It expects banks to increase SME loans on their portfolios by 20 percent by 2020.

The Central Bank of Egypt is fully committed to digitisation. In this context, Audi Bank has collaborated with various international professional services firms to establish a medium-term digital strategy to make further progress. 

In November, the Commercial International Bank (CIB) Egypt launched a comprehensive loan programme comprising products and services for SMEs. The bank aims to promote SME growth and expansion in Egypt. 

Rashwan Hammady, head of Business Banking at CIB, told the media that, “We fully understand what these segments want to grow and by extending this comprehensive loan structure to them, we hope to offer a holistic package of products and that feed directly into their growth story, which is part and parcel of our strategy to align with Egypt’s national growth story as well.” 

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According to the chairman of Banque Misr, Mohamed El Etreby, under the initiative, banks in Egypt will offer SMEs soft loans with interest rates of 5 percent and 7 percent.

The Central Bank of Egypt has also offered many initiatives to the SMEs. Some notable initiatives from the apex bank include allocating at least 20 percent of their credit portfolio to the SMEs.

Mohamed El Etreby highlighted that SMEs contribute about 33 percent to the gross domestic product (GDP) of developing countries, while their contribution to GDP reaches 59 percent in developed countries. The Central Bank of Egypt’s initiative to allocate funds to SMEs could be based on these facts.

Recently, the Central Bank of Egypt issued E£2.5 billion in treasury bonds on behalf of the Ministry of Finance. The bonds, which were offered in two installments with the first valued at E£1.25 billion with a three-year term and the second worth E£ 1.25 billion with a seven-year term.

The budget deficit for the current fiscal year is estimated to be around E£445.1 billion. The ministry plans to finance the deficit by issuing treasury bills and bonds and through international and Arab loans. The Ministry of Finance also aims to reduce the government debt to GDP ratio to 82.5 percent by the end of June 2020 and to 77.5 percent by the end of June 2022.

Governor of the Central Bank of Egypt, Tarek Amer on Monday stressed that the bank gives top priority to spurring financial inclusion rates, in parallel with Egypt’s Vision 2030 for sustainable development.

Tarek Amer underlined the importance of financial inclusion and the need to integrate all segments of the society into the formal financial system.

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He is currently the Managing Partner of Bahaa-ElDin Law Office in Cooperation with BonelliErede and Managing Partner of Thebes Consultancy, and has more than 30 year of experience in the fields of legal consultancy, compliance and governance of financial institutions. Now, Dr. Bahaa El-Din holds the positions of non-executive Board Member at AXA-Egypt, MTI, Samcrete for Industrial Development, Arabia Cement Company, NBE-UK, Saray Capital—DIFC, and Hassan Allam Holding.

In the field of volunteer work, he is a member of the Board of Trustees of the Cairo Regional Centre for International Commercial Arbitration, a Member of the Board of Trustees of the American University of Cairo, and Chairman of the Ahmed Bahaa El-Din Cultural Foundation in Assiut.

Previously, he earned his PhD in Financial Law from the London School of Economics in 1997, and his Master’s Degree in International Business Law from the University of London in 1989. He earned his undergraduate degrees of Law from Cairo University in 1986 and in Economics from the American University in Cairo in 1987.

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