Egypt’s rising bank deposits offer little help to investment climate

Customer checks US dollars in a bank in Cairo.

There has been an unprec­edented rise in deposits in Egyptian banks but the trend is doing lit­tle to encourage invest­ments or increase market activity, analysts said.
Deposits at banks rose $53 bil­lion from August 2016 through August 2017 to $169.4 billion, the Central Bank of Egypt said. Econo­mists attribute the rise to the suc­cess of Egyptian banks in securing greater market liquidity.
“Saving schemes introduced by the banks succeeded in encourag­ing members of the public to save their money, not spend it,” said Abdel Raouf al-Idrisi, an econom­ics professor at Egypt’s October 6 University. “These saving schemes absorbed most of the money in the market.”
Egyptian banks have introduced a range of products, including special saving schemes with in­terest rates of 16-20%. The high rates countered an unprecedented surge in commodity prices after the weakening of the Egyptian pound.
The saving plans attracted bil­lions of dollars. Many of those who had hoarded US dollars, in the hopes of profiting from rising exchange rates, sold dollars to pur­chase high-interest saving certifi­cates. From November 2016 and November 2017, Egyptians traded in $57 billion to local banks, Dep­uty Central Bank Governor Gamal Negm said.
The banks introduced the saving schemes to rein in runaway infla­tion, which was at a three-decade high. They wanted to eradicate a foreign currency parallel market by encouraging Egyptians to sell the foreign currencies and create a greater demand for the Egyptian pound.
“The banks’ saving schemes at­tracted huge amounts of money, liquidity that would have been in circulation in the market, which could have increased the inflation and weakened the national cur­rency even more,” Idrisi said.
The rise in the deposits was ac­companied by an increase in all economic indicators.
Real gross domestic product (GDP) rose by a revised 5% in the fourth quarter of the 2016-17 fiscal year, and averaged a 4.6% increase over the second half of the year, which represented the fastest growth since 2009-10, the Central Bank said.
Commodity exports grew by 10% in the fourth quarter while commodity imports fell by 14%, successfully narrowing Egypt’s trade deficit by 26%, according to the office of the presidency.
The rise in bank deposits re­flected a change in Egyptians’ saving culture, economists said. However, this has not been accom­panied by an increase in demand by local investors for loans.
“One reason this is happening is that bank interests on loans are very high,” said Ashraf al-Arabi, a member of the Egyptian Par­liament’s Economic Committee. “Instead of investing their money, people are buying saving certifi­cates to benefit from high interest rates and few people are ready to pay the high borrowing interest.”
The interest rate on some loans was 20%, which is scaring inves­tors away, he said. The banks do of­fer loans with lower interest rates to small-project developers and tourism investors but big projects that can move the economy for­ward and contribute to job crea­tion tend to require borrowing at higher interest rates.
“One can easily claim that the deposits have turned into a load on the banks, with few investors approaching these banks for loans at the current interest rates,” said economist and tax consultant Khaled al-Shafie. “The banks need to reduce the interest rates for bor­rowing a bit if they want to incen­tivise investments and encourage individuals and institutions to borrow.”