Economic experts predict that the Central Bank of Egypt’s (CBE) increase in interest rates will lead to a greater deficit and increase in domestic debt.
The government borrows the most from banks in order to finance its own budget deficit. The government’s current debt is projected to reach 11.5% (EGP 309bn) in fiscal year (FY) 2016/17.
Head of the Research Department at Prime Holding Abou Bakr Imam explained that the CBE should have waited until the end of Ramadan before increasing the interest rates, for several reasons.
“First of all, inflation always rises in Ramadan. Additionally, deposits by the United Arab Emirates and Saudi Arabia are to be received shortly after Ramadan, so inflation may decrease without the need to increase the interest rates,” Imam stated.
He added that—given the CBE’s decision—the budget deficit is expected to increase by EGP 40bn, increasing from EGP 309bn to EGP 349bn, since the hike in interest rates will cause an increase in debt.
Imam concluded that the CBE’s decision was made to tackle the expected increase in inflation after
Because government policies have been applied to decrease spending and reduce petroleum and electricity subsidies, Imam said it is an appropriate time for the CBE to increase interest rates in order to control inflation.
According to Aliaa El-Mahdy, a professor of economics at Cairo University, increasing interest rates while inflation is rising will help the bank attract new depositors.
Nevertheless, the delayed decision should have been implemented a long time ago to control the exchange rate between the US dollar and Egyptian pound, as the current effect may be negligible, according to El-Mahdy.