A Policy at a Crossroads
The Central Bank of Egypt faces conflicting goals: attract foreign capital with high interest rates, or foster local growth with affordable credit. The current IMF-backed strategy prioritizes the former, with profound consequences.
The IMF's Prescription: Conflicting Goals & A Bitter Pill
The IMF's policy uses a single tool—high interest rates—to chase conflicting objectives. The strategy to attract foreign capital ("hot money") directly undermines domestic economic stability and inflation control.
Goal: Attract "Hot Money"
To stabilize the currency, interest rates must offer a high premium over Western rates. This makes them exceptionally high, regardless of local economic conditions.
Conflict: Stifled Local Economy
Such high rates make credit unaffordable for local businesses, especially SMEs. Productive investment is crowded out, and the CBE is forced to end subsidized lending programs vital for growth.
Result: Debt & Inflation
The government must borrow more at these high rates, causing domestic debt to spiral. Meanwhile, massive interest payments inject liquidity into the economy, fueling inflation from the demand side.
The Domestic Debt Spiral
Despite achieving primary budget surpluses, Egypt's domestic debt has more than doubled since 2020. The primary driver? Compounding interest payments, which now consume the lion's share of state revenue.
Domestic Debt vs. Interest Payments
| Year Ending | Change in Debt (Billion EGP) | Interest Paid (Billion EGP) |
|---|---|---|
| Jun-21 | 602 | 518 |
| Jun-22 | 808 | 528 |
| Jun-23 | 1720 | 825 |
| Jun-24 | 1607 | 1674 |
Source: Table 4, Page 12 of working paper.
A Regressive System
104%
By June 2024, interest payments on domestic debt were projected to be 104% of the total increase in the debt stock for that year.
~80%
Of all taxes collected in the 2024/25 budget are projected to be spent on domestic interest payments—a massive transfer of wealth.
Widening the Gap: A Tale of Two Economies
The high-interest policy creates a stark divide. A small segment of the population with savings is shielded from inflation and earns significant passive income, while the unbanked majority sees their purchasing power evaporate.
The Savers (Top ~25%)
Benefit from high-interest savings accounts and government bonds. Their wealth is protected and grows through passive income, creating what the paper estimates to be over 700 billion EGP in annual interest income from bank deposits alone.
The Majority (Bottom ~75%)
With limited or no access to formal banking, they hold cash. High inflation erodes their savings and wages, diminishing their purchasing power and deepening economic hardship. They are left to bear the full brunt of rising prices.
Fueling Asset Bubbles
The massive liquidity injected into the hands of the wealthy doesn't just disappear. It chases returns, transforming an external supply shock into a domestic demand shock on assets.
From Interest Income to Asset Inflation
During periods of high inflation and uncertainty, those receiving significant, risk-free interest income seek to preserve their wealth in tangible assets. This new liquidity fuels demand for:
- Luxury Real Estate: Prices are driven up as real estate is perceived as a safe store of value, disconnected from the affordability for the average citizen.
- Imported Luxury Goods: Increased disposable income for the top segment fuels demand for high-end imports, putting further pressure on foreign currency reserves.
This dynamic creates asset bubbles and exacerbates inflation in specific sectors, rewarding rent-seeking behavior over productive investment in the real economy.
Credit for Consumption, Not Production
The policy mix has created a situation where the rate of return on fixed-income assets (r) is dramatically outpacing economic growth (g). More money is being created to pay interest than is being lent to the entire private business sector.
Growth Race: Indexed Cumulative Returns (Jun-21 = 1.00)
| Indicator | Jun-21 | Jun-22 | Jun-23 | Jun-24 |
|---|---|---|---|---|
| GDP | 1.00 | 1.18 | 1.43 | 2.08 |
| Claims on Private Business Sector | 1.00 | 1.27 | 1.51 | 1.91 |
| Total Domestic Interest Income Channel | 1.00 | 1.12 | 1.59 | 2.87 |
Source: Data indexed from Table 6 and graph on Page 16 of working paper.
125.8%
By 2024, the money created for domestic interest income was 125.8% of the total credit available for the entire private business sector in local currency.
The Paradox: An Inflationary Cure
Conventional theory says high interest rates reduce inflation. But in Egypt's high-debt, high-inequality context, they can become an engine for inflation itself by injecting massive liquidity where it's least needed.
The Tipping Point
The paper proposes a simple formula to find the interest rate at which money creation from savings outpaces the needs of economic growth:
Interest Rate > Nominal GDP Growth * (M1 / M2LC)
Using 2024/25 projections:
- Nominal GDP Growth (g) ≈ 27.5%
- M1/M2LC Ratio ≈ 0.49
This implies a tipping point interest rate of roughly 13.5%. Any effective interest rate on savings above this level injects more liquidity (M1) than the economy's growth requires, putting upward pressure on inflation.
The system ends up chasing its own tail: raising rates to absorb liquidity that the high rates themselves are creating.
M1 Growth vs. Interest Income
| Date | Money Supply (M1) | Est. p.a. Interest Income |
|---|---|---|
| Apr-22 | 1.00 | 1.00 |
| Jul-22 | 1.10 | 1.05 |
| Oct-22 | 1.18 | 1.11 |
| Jan-23 | 1.15 | 1.16 |
| Apr-23 | 1.38 | 1.19 |
| Jul-23 | 1.53 | 1.25 |
| Oct-23 | 1.63 | 1.32 |
| Jan-24 | 1.70 | 1.35 |
| Apr-24 | 1.67 | 1.50 |
| Jul-24 | 1.84 | 1.68 |
| Sep-24 | 1.83 | 1.77 |
Source: Indexed data from Chart 6, Page 21 of working paper.
Conclusion: A Need for a New Paradigm
The analysis strongly suggests that the IMF's one-size-fits-all interest rate policy is not only ineffective for controlling inflation in Egypt but is actively harmful. It compounds debt, exacerbates inequality, stifles productive investment, and paradoxically fuels inflation.
A more sustainable path would involve a nuanced policy mix that:
- Recognizes the structural differences of developing economies.
- Supports credit creation for productive sectors to address supply-side sources of inflation.
- Manages domestic debt through a broader toolkit, similar to that used by major central banks post-2008, rather than relying solely on short-term, high-interest debt.
- Prioritizes equitable growth over attracting volatile "hot money".