The Central Bank of Egypt (CBE) is expected to reduce the key interest rates by 200 basis points (2 percent) in May, according to a research note from Goldman Sachs.
This decision is based on the bank’s assessment that inflation will decrease to 20 percent by the end of 2024.
The CBE’s Monetary Policy Committee is scheduled to meet on May 23 to review the key interest rates, with the goal of bringing inflation down to 7 percent in the fourth quarter of 2024.
In an unscheduled meeting in March, the CBE raised the key interest rates by 600 basis points (6 percent), resulting in a total increase of 800 basis points (8 percent) since the beginning of 2024. Currently, the deposit rate, overnight lending rate, and rate of the main operation stand at 27.25 percent, 28.25 percent, and 27.75 percent, respectively.
Government borrowing, financing needs
The research note also mentions that the government’s total borrowing in the first quarter of 2024 amounted to EGP1.8 trillion, in addition to receiving EGP240 billion from the treasury. This exceeds the bank’s estimated financing needs of EGP1.1 trillion, with the government repaying EGP382 billion from the overdraft balance and leaving a surplus of EGP530 billion.
For the second quarter of 2024, the government’s financing needs are expected to decrease by half to EGP1.6 trillion, including EGP450 billion for settling the overdraft with the CBE. However, in the first quarter, the government borrowed more than necessary by approximately EGP530 billion and received around EGP340 billion as the second installment of the Ras El-Hekma development deal with the UAE, which was signed in February and amounted to $35 billion in foreign direct investment (FDI). This leaves a remaining gap of EGP724 billion.
Goldman Sachs calculations indicate that government debt issuances averaged EGP604 billion in the first quarter of 2024, with March alone exceeding EGP951 billion. This reduction in accepted bids by the government aims to alleviate pressure on its debt interest.
Projected GDP growth, inflation outlook
Egypt is currently involved in an Extended Fund Facility (EFF) loan program with a total value of $8 billion over 46 months. The International Monetary Fund (IMF) approved this program in December 2022 to address macroeconomic and budgetary imbalances resulting from tensions in the Middle East.
It is projected that Egypt’s real GDP growth will average 3 percent in 2024 before rebounding to 4.4 percent in 2025. However, inflation is expected to remain high in the short term due to the depreciation of the local currency. The IMF estimates that inflation will average 25.5 percent in the upcoming fiscal year 2024/2025 and then decrease to 15.2 percent by the end of the same fiscal year, thanks to a tightening of monetary policy and the appreciation of the local currency.
According to the latest data from Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS), the annual headline inflation rate reached 33.9 percent in March 2024, up from 12.1 percent in the same month of 2022. Similarly, the annual core inflation rate, as calculated by the CBE, rose to 33.7 percent in March 2024, compared to 35.1 percent in February 2024.
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