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Increase in interest rate threatens ability to attract investments, wastes opportunities - Daily News Egypt

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Increase in interest rate threatens ability to attract investments, wastes opportunities

The deflationary policy will increase inflation and production costs will climb, says Tawfik

The decision of the Central Bank of Egypt (CBE) to raise interest rates is a deflationary policy that will decrease investments at a time when the state is working on attracting foreign and local investments to raise the country’s production rate, said former chairperson of the Egyptian Direct Investment Association Hani Tawfik.

In a post on Facebook, Tawfik stated that the decision wastes opportunities due to the lack of coordination in managing the economic crisis that Egypt is currently undergoing. Production costs will rise and inflation will increase.

There are two types of price inflations, he stated. One of them is benign, which entails that production capacity is used to its fullest, resulting in an increase of demand on goods. This is followed by price increases. The CBE can contain this kind of inflation by raising interest rates to curb the demand, and pursuing deflationary policies. This helps with slowing down growth and controlling prices.

The second type of inflation is malicious. It is the result of rising production costs which causes prices to climb. This kind of inflation cannot be fought by raising interest rates, because it would lead to stagflation, according to Tawfik.

He added: “The solution lies within the monetary and expansionary fiscal policies to improve the investment climate, increase production and operation, and stimulate demand,” he added.

Medhat Nosseir, chairperson at ACT International, said that raising the interest rate is a key factor considered by investors when entering a new market. He explained that the rising cost of funding by raising the interest rate causes markets to lose opportunities in attracting investment.

He explained that besides the interest rates, investors look at the stability of financial and monetary policies, legislation, quality of investment opportunities, and the speed of entering and exiting markets to make their investment decisions. He called upon the government to improve the environment of doing business in Egypt.


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