Egyptian Banking System Enjoys Liquidity, Good Profitability

The International Monetary Fund (IMF) praised the monetary policy adopted by the Central Bank of Egypt (CBE) as part of an economic reform program aimed at achieving stable inflation rates, setting appropriate interest rates and stabilizing the local currency.

The IMF maintained a favorable outlook for Egypt's economy in its third major review of the country's loan program, saying that the experts mission and the government agreed that Egpyt should maintain its cautious monetary policy stance to contain the effects of the second wave of recent energy price hikes.

The CBE should take inflation expectations and demand pressures as a guiding indicator for any future monetary policy changes, the IMF said, noting the bank’s aim to reduce inflation to a single digit (below 10%) in the medium term.

The IMF pointed to the continued commitment of the government and the CBE to a flexible exchange rate to maintain competitiveness and mitigate external shocks.

It stressed that the Egyptian pound maintained relative stability during the past year, as the CBE did not intervene in the exchange market. It linked a slight decline witnessed in recent weeks to fluctuations in capital flows to some emerging markets.

The IMF commended the intention of the CBE to deepen the foreign exchange market among banks and enhance the flexibility of the exchange rate, as this flexibility provides a good room for managing any external volatility risks.

It underlined that the international reserves at the CBE are considered appropriate to support macroeconomic stability.

In addition, the IMF pointed out that the Egyptian authorities conducted a comprehensive review of the CBE law and the banking system with the backing of the IMF's technical support sector, to ensure that the law helps in determining price stability, strengthening the institutional and operational independence of the CBE and improving the early intervention and resolution frameworks.

It said that the CBE is continuing to strengthen its analytical capabilities and liquidity management and further develop the capital markets to improve the mechanism of cash transfer, and commended it for also continuing to improve its communication strategy.

The IMF confirmed that the Egyptian banking system still enjoys liquidity, good profitability and capital, while the overall capital adequacy ratio improved from 14% of risk weighed assets in December 2016 to 15.2% in December 2017. The leverage ratio improved from 4.8% to 6% during the same period. The ratio of bad loans also improved from 6% to 4.9% due to write-off of non-performing loans.

It predicted a balance of bank profitability in conjunction with lower interest rates, but it will remain sufficient to absorb the potential increase in credit risk costs.

Furthermore, the IMF underscored that most banks maintain strong liquidity reserves and manage their balance sheet activity to mitigate interest and liquidity risks through large holdings of government securities. It explained that the new CBE law would introduce amendments on the basis of the new frameworks to help provide emergency liquidity and banking solutions in line with international practices, as the Ministry of Finance and the CBE would set clear rules to expand public funds to maintain financial stability, in addition to financing banks and recapitalizing public banks in a way that would make them the government's responsibility.