Several government banks have increased interest rates on Egyptian pound denominated savings certificates days after the Central Bank of Egypt (CBE) raised interest rates by 1% to curb inflation.
Banque Misr decided to increase returns on the triple ‘Excellent’ savings certificate by 1%, up to 10.5% annually from 9.5%, in order to contain inflation. The National Bank of Egypt increased interest rates on its ‘Platinum’ certificate to 10.5% annually, while Banque du Caire also decided to increase interest rates for triple savings certificates up to 10.25% annually for quarterly returns and 10.375% annually for semi-annual returns.
“The banks having increased returns on savings certificates will attract new liquidity from the market and increase the profits for certificate holders,” said Ahmed El-Kholy, treasury official at the Housing and Development Bank. He added that there still exists a great amount of liquidity outside of the banking system and that tools and incentives like raising returns must be developed in order to attract liquidity.
El-Kholy continued, saying that the government consumes a great deal of bank liquidity in funding the budget deficit which is valued at EGP 240bn after President Abdel Fattah El-Sisi rejected a state budget with a deficit of EGP 288bn. This will push banks to increase the prices of IPOs for local debt instruments in order to cover government requests.
El-Kholy said that returns on government debt instruments in terms of bonds and treasury bills will likely rise for a second time albeit weakly, following banks having increased interest rates on their savings coffers. This followed the CBE’s 1% interest rate increase, which will hike up the cost of servicing government debt and frustrate efforts to reduce the budget deficit.
On the contrary, a finance ministry source expected the cost of local borrowing to drop due to the competition that will arise among banks to meet government needs. He also expected that this cost will decrease as a result of economic reform efforts taken by the government to control debt and the deficit after reducing subsidies and imposing additional taxes.
The Ministry of Finance increased the volume of its requests from the local market to borrow EGP 16.5bn from government debt instruments last week, compared with EGP 16bn the previous week. This is in spite of the CBE interest rate increase, meaning that banks for safe and quick havens for the government to fund the budget deficit.
Last week the government borrowed EGP 11.5bn by offering four auctions for short-term treasury bills. The bills were distributed across borrowing approximately EGP 2.5bn in bills for 91 days, EGP 2.5bn for 182 days, EGP 3bn for 266 days, and EGP 3.5bn for 357 days.
“Targeting inflation is the heart of the bank’s work, and increasing the interest rate and savings returns on part of the rest of banks attracts additional savings. This grants individuals greater returns and combats inflation,” said Fakhry Al-Fiky, former executive assistant director of the International Monetary Fund.
“There must be harmony between fiscal and cash policy makers in order to protect the state budget from an uncontrollable or accumulating public debt in light of a change in cash or fiscal policy,” he said. Al-Fiky considered the CBE’s decision to increase interest rates a sound decision for containing inflation, but feeling the results of the government auctions is a matter of time, he said, as the cost of domestic borrowing will increase during the first phase.
He further said that the government should move in the direction of implementing measures to reform the economy. According to Al-Fiky this would take place through improving business practices to attract new investments and increase profits;moves that will reduce the budget deficit and utilise bank liquidity to fund it.
Al-Fiky added that the increase in returns threatens to worsen the budget deficit, as each 1% increase holds approximately EGP 10bn which threatens to increase public debt due to an increase in servicing debt.