The International Monetary Fund (IMF) has 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 housing finance – stressing the need for unified interest rates in the banking market, according to three government sources who spoke to Bloomberg Asharq.
Egypt is currently in negotiations with the IMF on a new loan to retain the gains of the country’s first wave of economic reforms and meet the country’s financial needs in response to global economic challenges amid the Russian-Ukrainian war. In progress.
Egypt submitted the loan request in March. This is the first time that the negotiations have dragged on to this point without announcing a definitive agreement.
Meanwhile, Prime Minister Mostafa Madbouly said on Monday the government was in the final stages of negotiations. This happened during the Prime Minister’s participation in the third edition of the Logos Copt Youths Forum.
Daily News Egypt (DNE) dug deeper to find out the reasons behind the IMF’s demands, whether these measures would negatively affect all economic sectors and whether the government would really roll back these initiatives.
Economist and assistant professor at the American University in Cairo, Hany Genena explained to the DNE the philosophy behind the IMF’s demands, saying that multiple interest rates – including the subsidized interest rate – disrupt the effectiveness of the Monetary Policy
He also mentioned that the IMF is very interested in monetary policy as it relates to interest rates and the exchange rate, so while having multiple interest rates, we disrupted one of the mechanisms by which any central bank controls inflation and lending rates.
In particular, over the past six years, Egypt has launched a number of initiatives with low interest rate financing, such as financing the tourism sector with a subsidized interest rate of up to 8 %, small projects with an interest rate of 5%, medium-sized projects projects and the industrial and agricultural sector at an interest rate of 8%, and real estate financing activities with an interest rate included between 3% for social housing and 8% for social housing.
On Thursday, the Monetary Policy Committee (MPC) decided to keep the CBE’s overnight deposit rate, overnight lending rate and main operation rate unchanged at 11.25%, 12 .25% and 11.75%, respectively. The discount rate also remained unchanged at 11.75%.
The second reason given by Genena was that the IMF believes that the grants should come from a single institution in Egypt — the Ministry of Finance — and that this grant and its amount should appear under a single item in the general state 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 low interest rate initiatives in Egypt, they are subsidized 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 somehow compensates it, or the commercial bank supports the loan at a lower rate.
Low interest rate initiatives are not considered subsidized interest
For his part, Sherif Al-Diwany – former senior director and head of MENA at the World Economic Forum – told DNE that these low-interest initiatives are not considered subsidized, as there is no subsidy. directly for the interest of the general budget, as the general state budget does not bear the cost of the low interest rate.
He also stressed that there would be no reason to cancel it, doubting that the IMF would ask for its removal.
Moreover, he believes that these initiatives are implemented in a system that respects the banking sector and does not negatively impact the ECB or the State.
Al-Diwany then explained that central banks around the world require any bank operating in the market to allocate a certain reserve equal to 25% of its total money in the central bank account without interest. However, the CBE removed this condition during low-interest loans for the industrial sector, which meant that the money was loaned free of charge.
“Imagine if you own a commercial bank that operates with 100 billion EGP and you need to put 25 billion EGP of it into the CBE account without interest, then the CBE suggested you to lend 10 billion EGP “EGP to the industrial sector and it will cancel the EGP 25 billion. In this case, there is no cost for low interest loans,” he said.
Talking about the philosophy of the IMF, Genena said that Egypt entered into an agreement with the IMF around 1990 and 1991. Before that, in the 1980s, there were three interest rates – one for the agricultural sector, one for industry and one for services. — where interest in the agricultural sector was the lowest, the industrial sector average and the service sector the highest.
Genena said that the IMF demanded at the time to have a unified interest rate, so this is not the first time we see this thinking or this philosophy of the IMF.
He also mentioned that currently Egypt has unified customs dollar and banking dollar.
Should these requests be met?
Genena asserted that a lot of people in the industrial sector benefit from the 5% and 8% interest rates, so the government will have to negotiate more with the IMF in order to reach an agreement on the phasing out of the low cost initiatives. interest rate. .
“Interest rates are going to rise over the next six months, so if the government rolls back the initiatives – and the USD exchange price goes up – unfortunately the industrial sector will be screwed,” he warned.
He added that the Egyptian government will have to reach an agreement with the IMF in which it maintains the initiatives and fulfills the other conditions.
“After going up, interest rates will eventually come down gradually, and then by next year, all sectors will benefit from low interest rates. At this point, the CBE can cancel low interest rate initiatives without destabilizing the sector, as there would be a viable average interest rate to fall back on.
In agreement with Genena, Al-Diwany explained that these initiatives support the industrial sector in Egypt; their cancellation would cause a great shock in the sector and would have a negative impact on investment and growth rates in the country.