Egypt's private sector caught off guard by central bank move to cut financial aid scheme

The 8 per cent initiative let private sector companies take loans from banks at less than half the current interest rate

The Central Bank of Egypt in downtown Cairo. The bank has faced criticism for ending its 8 per cent interest rate initiative. EPA

A financing scheme launched in 2019 by the Central Bank of Egypt to support private sector projects in the industrial, real estate and agricultural sectors was halted on Tuesday — in a decision that took many by surprise.

The scheme called the 8 per cent initiative, allowed private sector companies to establish lines of credit with Egyptian banks at this reduced interest rate.

The difference in interest rates would be paid to the lender banks out of the national budget, according to a 2019 central bank statement.

Last month, market interest rates reached about 19 per cent — more than double the rate paid by scheme recipients.

This initiative had been a lifeline for many private sector companies in Egypt, according to Ali Eissa, head of the Egyptian Businessmen's Association.

He said in a televised phone-in on Tuesday night that it was essential for getting thousands of private companies through the economic hardships of the Covid-19 pandemic and help soften the impact of the war in Ukraine.

However, a joint Cabinet-CBE statement released on Tuesday night said that while the initiative’s beneficiaries would be allowed to pay back their loans, whether short or long term, to lender banks at 8 per cent, new loans would be given only at market-determined interest rates.

Since the initiative came into effect in 2019, the central bank has paid 345 billion Egyptian pounds ($14.05 billion) to banks to cover the difference between the reduced interest rate given to producers and the market interest rate.

At the time of the launch, the market rate was 11 per cent.

Most of the loans given out under the initiative were short-term, according to Mr Eissa.

The government statement said these loans will have to be paid back within a year.

This decision was met with opposition from the private sector.

The EBA said on Tuesday that a document has already been sent to the Egyptian Cabinet asking that businesses get five years to come off the scheme.

It said most of the businesses would not survive the sharp increase from the state-supported 8 per cent interest rate to the market-determined of more than twice that.

It is petitioning the government to allow businesses to pay back 20 per cent of what is owed each year over the next five years, saying this would be optimal for the stability of prices and the economy.

Mr Eissa said he expected the industrial and agricultural sectors to be most affected.

The CBE intends to redirect a large part of the funds allocated for the 8 per cent initiative into Housing Ministry projects to construct mid and low-income homes.

“We appreciate that the government is under tremendous pressure right now, but schemes as large as this can’t be halted so suddenly,” Mr Eissa said during a Tuesday phone-in to Kelma Akheera, a popular talk show.

“The first response from these factories would be to cut supplies which would drive up prices for the consumer. Many of them have already had to decrease supplies because they can't import materials they need.”

Prices in Egypt — especially for food — have jumped in recent weeks, after economic reforms implemented by the CBE to secure a $3 billion loan from the International Monetary Fund.

These included two currency devaluations — in March and October — that saw the Egyptian pound fall 20 per cent against the dollar.

Supply chain disruptions caused by the war in Ukraine, one of Egypt’s most important sources of wheat and tourists, have driven the country's inflation to its highest levels in years.

The situation was made much worse by the outflow of more than $20 billion in foreign investments from the CBE's coffers earlier this year. This caused a dollar shortage that led to controls on the bank's part to curb imports.

Mr Eissa said the EBA’s request for a meeting with the central bank to address the issue has been met with silence.

“The scheme was implemented to help businesses out under 2019’s economic conditions, which were markedly better than they are today, which is why we were caught off guard by this decision,” he said.

According to a recent report by Tokyo-based financial company Nomura Holdings, Egypt's economy is vulnerable to a currency crisis over the next 12 months.

In October, the government raised the minimum wage for public sector employees from 2,700 Egyptian pounds to 3,000, in a bid to help citizens with rising prices.

It also froze electricity prices through to June 2023, when the central bank is expected to pay back $28 billion in external loans.

However, experts have said that with inflation increasing to 19 per cent in November and expected to rise further, the salary increase is not sufficient to curb the problem.