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Al-Ahram Weekly 8 - 14 July 1999 Issue No. 437 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 8 - 14 July 1999 Issue No. 437
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Profile Features Focus Books Travel Living Sports Time Out Chronicles People Cartoons Letters Liquidity crunch, a blessing in disguise?
By Niveen WahishFor the past month, the banking sector has faced a shortage of liquidity for the short-term settlement of inter-bank transactions. This means that there is a gap between bank resources and the needed liquidity for providing loans or investing. As a result, inter-bank interest rates rose from around nine per cent to between 12.5 and 13 per cent. To deal with the problem, the Central Bank of Egypt (CBE) has been temporarily buying back treasury bills from banks to provide them with liquidity in a process called "repos".
Several factors are cited by experts as having led to the shortage.
Foremost among these, according to Mounir El-Zahid, general manager for corporate banking at the Egyptian-British Bank, was increased bank lending which was accompanied by a high rate of defaults, or unrepaid loans. This led to a decline in banking sector deposits from around LE200 billion to LE170 billion. Moreover, substantial amounts of money have been withdrawn from the commercial banks and placed in the Central Bank. This includes social insurance pensions valued at around LE1 billion. The funds were withdrawn from the banks in order to invest them in the stock market. The good performance of the stock market has also lured individuals to withdraw their bank deposits and invest them in securities.
But it is not only the stock market that is luring depositors' money away from the banks. Corporate bonds have also attracted investors. Many of those bonds offer interest rates of up to 12 per cent, which is higher than the 10 per cent offered by the banks.
However, the recent shortage in liquidity might also be a blessing in disguise. According to El-Zahid, the liquidity crunch has prevented the collapse of the Egyptian currency against the dollar. "Had there been enough liquidity, the value of the Egyptian pound would certainly have declined further," he said.
While El-Zahid praised CBE's policy in handling the shortage, "since it has successfully provided the amounts needed to keep circulation moving," he stressed that "the real solution" lies in increasing domestic savings. The current savings rate stands at less than eight per cent of GDP, which "is not enough to stimulate the economy's growth," he said.
The solution is not the setting of high interest rates to encourage savings, said El-Zahid. This procedure, which was used in the early 1990s, was necessary at the time "because Egypt was on the threshold of a restructuring of the economy, and so [high interest rates were] needed as a bridge in a transitional period," he said. "Today the situation is different, and there is a free market. If such interest rates were to be artificially raised, by government intervention rather than market forces, this would not be perceived positively in the international financial sector," he added.
The real solution, El-Zahid said, is to increase production which will eventually result in higher per capita income and greater savings.
While admitting that there is a liquidity problem in the banks, Nashaat Abdel-Aziz, an analyst at Egyptians Abroad For Investment, points out that the shortage "has so far been confined to inter-bank transactions, and has not affected the liquidity available to bank customers."
According to many experts, the problem was exacerbated recently by multiple issues of treasury bonds and bills during the last six months. This, in turn, drained a considerable amount of liquidity from the banking sector. During this period, LE4 billion worth of treasury bonds were offered to investors.
