By Patrick Werr
In its newly released annual budget, Egypt's central bank revealed a continuous increase in lending to the government, despite a decrease in inflation from its peak in September. This trend has raised concerns among economists about the potential negative impact on the economy, including inflation and exchange rate fluctuations.
The latest data from the central bank shows a significant rise in the "M1" money supply, which includes domestic currency in circulation and demand deposits in Egyptian pounds. This growth in money supply has coincided with a period of economic vulnerabilities exacerbated by external shocks such as the COVID-19 pandemic and the conflict in Ukraine.
Although headline inflation has decreased from its peak, experts warn that the rapid expansion of money supply could have long-term consequences on the economy. Analysts like James Swanston of Capital Economics suggest that the slowing growth rate of money supply may have contributed to the decline in inflation rates.
As of June, the central bank held 1.36 trillion Egyptian pounds in securities purchased from the finance ministry, reflecting an increase from the previous year. Egypt had committed to reducing central bank lending to the government as part of a financial support agreement with the IMF, but missed targets due to delays in external funding.
The government's increased spending on infrastructure projects and subsidies has further strained the economy, prompting pledges to reduce lending to other government agencies and limit borrowing in the future.
In conclusion, Egypt's central bank's lending practices and the subsequent impact on money supply and inflation rates are key factors to monitor for investors and individuals alike. Understanding these dynamics can help individuals make informed decisions about their finances and investments in light of the country's economic challenges.