The past almost one year has been more of a rollercoaster of economic challenges for Egypt and the world. Inflation and devaluation have left many Egyptians struggling to make ends meet. Earlier this month, main national banks have launched new certificates of deposits (CDs). But are these CDs a safe bet for those looking to invest their savings?
What you need to know
Before diving into the world of CDs in Egypt, it’s important to understand what they are and how they work. Simply put, a CD is a type of savings account that pays a fixed interest rate over a set period of time. Unlike regular savings accounts, the money invested in CDs cannot be withdrawn until the end of the term without being penalized.
The new certificates of deposit introduced by the Central Bank of Egypt (CBE) offer higher interest rates than traditional savings accounts and come with varying terms ranging from three months to five years. The CBE hopes that these CDs will help combat inflation by encouraging Egyptians to save their money instead of spending it. By taking more money out of circulation, the government aims to control inflation that has been affecting businesses and citizens alike.
Whether this assumed behavior is realistic today or not, investing in CDs can provide stability for your finances as well as peace of mind knowing that your principal investment is protected. However, it’s important to note that investing in any financial product comes with risks and potential drawbacks such asa fall in the value of the saved money due to inflation or missed opportunities for higher returns.
When considering investing in CDs, it’s essential to research different banks’ rates and terms thoroughly. Additionally, be sure to factor in taxes on any earned interest when calculating potential return on investment. By understanding these key points about CDs in Egypt, investors can make informed decisions about whether or not they’re right for them.
On March 30, the Central Bank of Egypt (CBE) announced a two percent increase in key interest rates to tackle the country’s soaring inflation. This decision was followed by the National Bank of Egypt and Banque Misr announcing the issuance of two new certificates of deposits (CDs) for a period of three years on April 2.
Economic basics: what is the impact of this change?
The impact of rising interest rates is likely to differ from one group of people to another. For businesses, this could mean a higher cost of capital. Higher interest rates make borrowing more expensive, leading to lower profitability and reduced demand for their products or services. On the other hand, people with savings will have the opportunity to earn more on their deposits.
However, rising interest rates can also have a contractionary effect on the economy, leading to reduced supply and demand, which affects the activity of businesses and the job market. This contraction can affect the spending ability and livelihood of consumers, particularly those who are not business owners or savers.
What are the new certificates of deposits, and how do they fit into the picture?
The National Bank of Egypt and Banque Misr announced the issuance of two new CDs for a period of three years on the 2nd of April. The first certificate is fixed for a period of three years at a rate of 19 percent annually, with returns paid monthly. The second certificate is for a period of three years at an annual rate of 22 percent for the first year, 18 percent for the second year, and 16 percent for the third year, with returns paid monthly.
These new CDs provide an attractive investment opportunity for people with savings. They offer high-interest rates and fixed returns, which can be a safer option than investing in the stock market or other high-risk ventures.
Wishful thinking on the government’s part to encourage people to save more and spend less, the impact of higher interest rates is likely to differ from one group of people to another. The new CDs provide an viable investment opportunity for people with savings, but they may not be accessible or attractive to everyone. Furthermore, rising interest rates can have a contractionary effect on economic activity.
Hany Genena, economist and adjunct professor of management at the American University in Cairo (AUC) School of Business, analyzes the CBE’s decision to raise the policy interest rate corridor by 200 basis points (2 percent) to reach a mid-rate of 18.75 percent by the end of March 2023. The rate hike was widely anticipated and driven by three main factors: rampant inflationary pressures, a sharp divergence between the official and parallel USD/EGP rates, and the need to support the banking sector’s ability to issue high-rate certificates of deposits to combat dollarization and replace the maturing 18 percent CDs.
Genena believes that interest rate hikes work in Egypt because inflationary pressures are triggered by too much money chasing too few goods. He notes that the main form of money in most modern societies is “deposit money”, claims on commercial banks rather than banknotes issued by the central bank. The increase in the supply of “deposit money” is driven by the soaring demand for loans because “every loan creates a deposit” rather than the other way around. Therefore, the objective of successive policy rate hikes executed by the CBE since March 2022 is to contain the demand for loans and, consequently, contain the growth rate in deposit money, which is the largest component of the money supply.
Containing the growth rate in domestic liquidity takes time but is certainly happening, according to Genena. By the third quarter of 2022, the year-over-year growth rate in M2D (the EGP-denominated component of money supply) had grown by around 23 percent. By the end of February 2023, the growth rate had decelerated to 20 percent and is expected to soften further towards a target range of 14-15 percent year-over-year by the end of 2023, if and only if the CBE sticks to its guns and continues to tighten financial conditions.
If the CBE continues with its current policy, Genena believes that inflationary expectations will be well anchored, reducing the velocity of circulation. This would result in inflationary pressures converging towards the mid-teens by the end of the year, which indicates the relevance of the decision of raising interest rates and issuing high-rate CDs.