Analysts believe that the reduction process is mainly aimed at raising the interest on the yoke of the government, which is the largest debtor from banks, as every 1 percent reduction in interest saves billions of dollars on the state treasury and raises the proportion of filling the budget deficit.
The second goal may be to stimulate investment after trillions of pounds have accumulated within the banking sector and do not find anyone using them, and if the recent reduction does not achieve what the government wants, there may be other cuts, and at the same time they ruled out raising the interest rate again.
The Egyptian economy is considered one of the few economies in the region that managed to achieve a growth of 2 percent during the first quarter of the fiscal year 20-21, according to the estimates of many international bodies and agencies. The European Bank for Reconstruction and Development expected growth in Egypt to reach 3.3 percent in the fiscal year 2020-2021, and the same bank also expected the growth rate to rebound to 5 percent in the next fiscal year.
Sputnik quoted Egyptian money market expert Hanan Ramses as saying that “to reduce the interest rate on deposits and loans in banks, we must divide society into two groups. There will be a wave of discontent as a result of the successive declines, and a certificate with a high interest rate (15 percent) was created for them under the name of “Giving Back”.
She added, “As for the rest of the groups that are of working age and are able to give, the central bank wanted to encourage them to invest and leave the field of savings because the only consumer of loans from banks is the state, which is close to completing all its projects, and during some period the banks will pay interest on existing funds. “It finds people who invest in it. Even the central bank was suffering in a previous period from a huge increase in deposits and did not find a way to employ them.”
Ramses added, “The Central Bank wanted, through lowering the interest rate, to activate small and micro enterprises and to integrate the formal and informal economy in order to encourage development. We have seen that the World Bank talked about the rates of development in Egypt, which rose to 3.5 percent after it was intended for them. 2 percent, which means higher employment rates and lower unemployment rates.
Reducing unemployment rates comes from encouraging young people who have any skills to open private projects, so that the state conducts a feasibility study for the project and stands by it in the marketing process and when it fails to pay it gives it a grace period, because the state in Egypt saw that countries with high population densities have turned to small and infinite projects. Smallness as a supporter of its economy, like China, which has transformed residential areas into small artisanal production sectors according to the resources available in each region.
The money market expert indicated that the process of lowering the interest rate reduces the state’s budget deficit, because every 1 percent reduction in the interest rate saves trillions of dollars, and this supports the budget and makes it a surplus, and that reducing the interest rate on loans and deposits gives Egypt an opportunity to schedule debts. The external burden becomes less on the public budget, and the reduction also allows the completion of infrastructure projects, also allows the state to use loans at low interest and allows it to invest according to its capacity, which helps it to reduce the price of the product.
The money market expert expects that there will be further cuts in interest rates in banks, indicating that the process of hiking is not forthcoming in the short term and encouraging borrowing to stimulate development.
In the budget for the fiscal year 20-21, the Egyptian government aims for the total deficit to reach 6.3 percent of GDP, while the estimates of public debt service benefits to be paid for the same fiscal year are about 33 percent of the total expenditures in the draft budget.
For his part, Egyptian economic analyst Mohamed Nasr Al-Huwaiti said, “The interest rate increases are often linked to high levels of inflation, so the interest rate is raised to reduce the liquidity circulating in the market. So prices rise and inflation occurs. In Egypt, when interest rates were raised to control the rate of inflation, in fact our inflation was not a result of increased consumer spending, but rather an increase in commodity prices.
He continued, “Bank clients in Egypt will remain the same even if the interest reaches zero, and also for real estate for fear of risk. They do not prefer any other tools that can be easily converted into liquidity in record time, such as gold and the dollar. It enhances people’s demand for spending, and thus inflation rates will not be controlled as the central bank wants.
Al-Huwaiti explained, “The matter also has to do with the country’s internal debts from banks, as the state is the largest ‘borrower’ and government banks are the largest ‘lender’, as the state believes that the debt service burden has become too high, and thus the state seeks to reduce the interest rate in order to reduce The burdens of debt service, and often there will be a decision by the Central Bank of Egypt within days to reduce the interest rate in general, ranging between 1 and 2 percent.
He added, “It is natural that this reduction will have a positive return on investment, for savers withdraw their money from banks and invest them in the market, which creates a boom in real estate and direct and indirect investment, for example, but the truth is that lowering the interest rate will not make bank customers withdraw Their money to the market as a kind of reserve. ”
The Central Bank of Egypt announced last month that it would reduce interest rates to 9.75 percent for lending and 8.75 percent for deposit, making this the twelfth time that the Central Bank has moved the interest rate since the liberalization of the Egyptian pound exchange rate in November 2016.
The central bank attributed the decision to cut interest to the easing of inflationary pressures, as the annual rate of inflation fell to 3.4 percent in August of this year, the second lowest rate recorded in nearly fourteen years.
According to the Central Bank of Egypt, the family sector accounts for 81.9 percent of the total deposits of banks operating in the Egyptian market by the end of March 2020.
Egypt announced a few days ago that foreign exchange reserves had risen to 38.425 billion dollars at the end of last September, coming from the level of 38.366 billion dollars at the end of August, and the Egyptian reserves exceeded forty-five billion dollars before the outbreak of the Corona epidemic last March.
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