Diverse sources of financing state budget deficit reduce impact of high interest rates, says finance ministry official
Raising interest rates by 2% increases debt payments by EGP 30bn in FY 2017/2018, says MP
Egypt’s Ministry of Finance diversifies the sources of financing the budget deficit from the domestic and international markets, as borrowing from abroad is less expensive than the domestic market now, according to an official in the ministry.
The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to increase the overnight deposit and lending rates by 200 basis points from 14.75% to 16.75%, and from 15.75% to 17.75%, respectively.
Member of parliament (MP) Mohamed Fouad, a member of the plan and budget committee in parliament, predicted that the CBE’s decision will add more than EGP 30bn to the state budget’s debt service for fiscal year (FY) 2017/2018.
When the overnight deposit and lending rates are increased by 100 basis points, the debt service will rise by more than EGP 15bn, threatening the country’s fiscal policy. This decision came in response to the demands of the International Monetary Fund, according to Fouad.
He added that the planned state budget for FY 2017/2018 will spend EGP 380.986bn on interest expenses.
Egypt paid EGP 243.635bn in debt interest payments for FY 2015/2016, while the Ministry of Finance expects to pay EGP 303.879bn in interest payments for the current FY.
Fouad said that increasing the burden of interest expenses on the state budget means that the government cannot postpone the expected increase in prices of energy, water, and electricity after the beginning of the new fiscal year.The central banks around the world usually tend to increase interest rates to lower cash supply in a market with a high inflation rate.The CBE decided in November 2016 to float the local exchange rate against the US dollar and raised the return on overnight deposits and lending by 3%.