November 24, 2011
By Farah Halime
CAIRO (Zawya Dow Jones) — Egypt’s central bank Thursday raised its rates for first time in two years in what economists said was an effort to shore up the faltering Egyptian pound and inject much-needed liquidity into the country.
The decision came on the same day Standard & Poor’s cut the country’s debt rating by one notch to B plus, pushing the Egypt’s sovereign debt further into junk status.
The bank’s rate-setting committee lifted the overnight deposit rate by 100 basis points to 9.25%. The overnight lending rate climbs to 10.25%, while the discount rate rises 100 basis points to 9.5%.
The rate increases came as no surprise, considering the pound’s steady decline against the dollar during this year’s political upheaval. Egyptians rose up against Hosni Mubarak early in the year and in recent weeks have been revolting against the military council that replaced the toppled leader.
Wael Ziada, head of research at EFG Hermes in Cairo, said the bank acted “partly to support the pound but partly to manage liquidity.”
The move “will provide financial institutions and banks the capacity to reprice deposits by offering deposits and loans at a higher rate, which should attract more liquidity,” he said.
With foreign investors fleeing the country and its foreign currency reserves dwindling, the central bank has turned to local lenders to narrow the budget by selling government securities.
Other measures also paint a gloomy picture. The economy grew just 1.8% in the fiscal year that ended in June, and the country is struggling with high inflation.
The annual rate declined to 7.1% in October, from 8.21% in September, according to Egypt’s statistics agency, while the country’s jobless rate rose to 11.9% in the third quarter from 8.9% a year earlier.
Magda Kandil, the executive director and director of research at the Egyptian Center for Economic Studies in Cairo, said that although raising interest rates is generally perceived as “a contractionary policy that could have some negative impacts for recovery,” there are benefits.
Higher rates will encourage foreign investors to pump money into Egypt and people to keep their money in local banks, she said.
Kandil, a former economist at the International Monetary Fund, added that the central back is “stuck in a difficult situation” because it is trying to “manage the exchange rate and stem the risk of inflation without being perceived as counterproductive post-revolution.”
Egypt’s central bank has sold foreign exchange reserves to stabilize the Egyptian pound and prevent deflation, but Kandil said that has been at the expense of a healthy reserve bank.
In October, the central bank announced that its net international reserves fell to $22 billion, down from $24 billion in September and sharply lower than $35 billion at the start of the year, before Mubarak was ousted.
Reserves have been declining as tourism receipts remain depressed and foreign investors have sold out of Egypt’s equity and treasury bill markets, leaving the government reliant on the local banks for funding.