Egyptians are bearing the brunt of the Russian-Ukrainian war which broke out in February as food and other commodity prices are soaring.
According to the Central Agency for Public Mobilization and Statistics (CAPMAS), the annual urban consumer price inflation increased in March to 10.5 percent, its highest in nearly three years, compared to 8.8 percent a month earlier.
The inflation increase is mainly due to food shortages following the Russian war and experts expect that the rate will continue to grow in the coming months.
In order to deal with the crisis, many Egyptians have started to consume less or resort to converting their savings to investment certificates at banks which offered high interest rates last month.
“We have largely cut off our consumption in order to be able to satisfy our needs,” Hala Mohamed, a housewife, told Majalla.
“For example, I am now buying less cooking oil and not buying chicken and meat like before,” she added.
In March, the Central Bank of Egypt (CBE) surprised the markets with an extraordinary meeting of the Monetary Policy Committee, four days before its official date, during which it decided to increase the overnight deposit and lending rates by 100 basis points to reach 9.25 percent, 10.25 percent, respectively. The credit and discount rate was also raised by 100 basis points to 9.75 percent.
In tandem with the announcement of the interest rate decision, the Egyptian pound was floated, in the first two days reaching its lowest level since January 2017 and recording 18.45 pounds for purchase and 18.55 pounds for sale.
According to the CBE, the decision to raise interest rates aimed at confronting global inflationary pressures that have begun to reappear due to the developments of the Russian-Ukrainian conflict, the noticeable rise in global prices of basic commodities, supply chain disruptions and high shipping costs, in addition to financial market fluctuations in emerging countries.
Goldman Sachs Bank, the famous institution for providing financial and investment services, stated that the CBE’s decisions to reduce the pound by 10-11 percent and raise the main interest rate by 100 basis points, increase the attractiveness of the Egyptian market to international investors and global investment funds.
LONG QUEUES
The two largest government banks issued annual savings certificates, the return on which is distributed monthly at an interest rate of up to 18 percent.
Long queues were seen at Egyptian banks following the announcement as many holders of bank accounts are seeking to weather the tough consequences of the war.
“We have been already struggling because of the coronavirus pandemic with job losses and soaring prices. This war is going to make it worse and worse. That is why we are rushing to any solution,” Ahmed Ibrahim, a civil servant, told Majalla, while waiting at an Egyptian bank in eastern Cairo.
Hoda Ali, another civil servant, shared Ibrahim’s worries. “I will be losing money by turning my investment certificates which I bought at an interest rate of 11 percent into certificates with aninterest rate of 18 percent. But I do not have any other choice,” she said.
Before the Ukrainian crisis, things were going well in the local economy with a recovery in the tourism sector, a steadily rising cash reserve even if in small amounts, exports rising to the highest level thereby breaking the LE30 billion barrier, and the inflation rate stabilizing at the target limit of 7 percent.
Now, all these achievements seem to be coming to an end.
But experts have lauded the Central Bank’s decisions to increase interest rate and float the Egyptian pound against the US dollar, saying that they will soothe the harsh effects of the war.
Mohamed Abdel-Aal, a banking expert, said that the central bank’s decisions were made under circumstances beyond the control of the Egyptian economy, and their aim was to protect the gains of the economic reform program and to absorb any new inflationary pressures stemming from the Russian-Ukrainian crisis.
Abdel-Aal added that moving the dollar exchange rate achieves gains for the Egyptian economy, by encouraging the remittances of Egyptians working abroad and increasing the attractiveness of the pound to indirect foreign investment after the interest rate and exchange rate improved.
These decisions, according to Abdel-Aal, will make the pound maintain its attractive position among the list of currencies that achieve a real return among the currencies of emerging countries.
It will also support Egyptian exports by giving exports greater competitiveness against similar goods, he said.
However, the interest rate hike exacerbates the burden of financing the public debt on the state’s general budget. It also limits the government’s objectives to reduce the budget deficit and control the public debt as well as the unemployment rate,and increase the contribution of the private sector to the economy.
In turn, Minister of Finance Mohamed Maait confirmed in a recent press conference that his ministry seeks to reduce the debt to below 90 percent by the end of the current fiscal year on June 30, 2022.
The government lowered its forecast for economic growth for the next fiscal year 2022-2023 to 5.5 percent, compared to a previous forecast of 5.7 percent before the outbreak of the Ukraine war, according to the Ministry of Planning.
Despite the difficult challenges to the public treasury, the government announced a package of financial and social protection measures worth 130 billion Egyptian pounds to deal with the repercussions of global economic challenges and mitigate their effects on citizens.
This package included the provision of 7.2 billion Egyptian pounds to include 450,000 new families as beneficiaries of “Takaful and Karama,” and an earlier date for annual bonuses to start - from April, not June, as usual.
The government tried to absorb the impact of interest and the dollar on the private sector, so it reintroduced the customs dollar at 16 pounds for basic commodities and production requirements, as a substitute for the average bank dollar rate, with the state’s public treasury bearing the value of the real estate tax due on the industrial sectors for a period of 3 years, at a value of 75.3 billion Egyptian pounds.
ATTRACTING INVESTORS
The government also included a set of additional tax incentives to support the capital market and increase the demand for trading as well as for listing companies on the stock exchange, exempting a percentage of the profit attained by shareholders equivalent to the credit and discount rate issued by the CBE at the beginning of each calendar year, and deducting 50 percent of the value of capital gains realized upon an initial public offering on the stock exchange for a period of two years, to be reduced to 25 per cent thereafter.
Mohamed Abdel Wahab, an economist, said that floating the pound aims to control the withdrawal of indirect foreign investments from the Egyptian market in light of great competition in the bond markets after the US Federal Reserve raised interest rates with expectations of raising it more than once during the current year.
Abdel Wahab believes that these decisions will attract foreign investors, especially Arabs, in light of the crisis in Russia and Ukraine which is casting a shadow over the global economy, especially in light of investors’ confidence and security in the local market, more so than in Western markets at the present time.
Abdel Wahab bases his prediction on a wave of freezing Russian investments in Arab countries, estimated at billions of dollars, allegedly linked to the Russian President's regime, which made many investors see that emerging markets are safer.
