Central Bank of Egypt’s Emergency Rate Cuts Were Necessary, But Not Enough

The interest rate cuts made by the Central Bank of Egypt , the largest since the flotation of the Egyptian pound in November 2016, were necessary to contain the severe impact of the coronavirus outbreak and other global, regional challenges, yet they alone are not sufficient, a number of experts told.

Economic and financial markets expert Hani Tawfik told that the CBE had done what was needed by introducing 3 percent cuts to the key interest rates amid the domestic and global challenges.

In the short run, Tawfik said, the cuts will have a significant positive impact on the public debt, as this action will save the budget between EGP 100 billion and EGP 150 billion, and will improve the investment environment.

But these steps are not enough to avoid the current challenges, especially in regard to investment restrictions, including the complicated procedures for granting licenses, the lack of real incentives to attract more investments, and the high prices of energy for factories after the cancelling of subsidies.

“These issues, if they were solved, would help in boosting operation and production. Moreover, this phase and the resulting precautionary procedures, especially in the economic field, are a real chance for further support for domestic production to meet the market’s needs amid the travel restrictions due to the coronavirus outbreak and the decline in imported commodities as a result of that,” Tawfik said.

On Egypt’s stock market, Tawfik asserted that, historically, there has been no relationship between rate cuts and the stock exchange’s recovery, adding that the US cut its rates to 0 percent, but the Dow Jones index dropped on Monday by 12 percent.

However, Tawfik warned that foreign withdrawal from the Egyptian market through selling shares and treasury bills will result in greater pressure on the dollar in the local market, which will be a serious problem.

In the long run, Tawfik said he expects that the CBE will not introduce more cuts in 2020, especially as the recent cuts bring the real interest rate after excluding inflation to 0 percent.

The head of Research at Pharos Holding, Radwa El Swaify, told Ahram Online that introducing new cuts amid the current challenges was a bold decision that will boost economic growth, the manufacturing sector, and the stock market’s performance.

She also said that it will support the state’s budget through easing the public debt burdens, which is the key cause of the budget deficit.

“In light of the significant pressure on foreign investment portfolios due to foreigners’ withdrawals and pressure on the Egyptian pound, tourism revenues, and Egyptian expat remittances, the new cuts come at the right time,” she said.

On the other hand, banking expert Hani Abo Elfottouh told Ahram Online that the new cuts are a double-edged sword, as they will enhance the performance of the deteriorated financial market and stock exchange, but will have a negative impact on foreign investments in the domestic market, especially in t-bills.

The International Monetary Fund (IMF) has urged central banks across the world to implement further monetary easing policies, including introducing more rate cuts, amid the current outbreak.

Besides the COVID-19 threat, an oil price war between OPEC countries and Russia has also roiled markets, sending the price of Brent crude to under $30 a barrel.