Egypt central bank expands lending to government, but inflation slows

Lending to the government by Egypt’s central bank continued to climb in the last fiscal year, according to the bank’s newly-released annual budget, even as inflation has slid from an all-time peak in September, Reuters has reported. Economists have said that such lending by the central bank risks undermining the economy by expanding the money supply, fuelling inflation and causing the exchange rate to weaken against foreign currencies.

Central bank figures show that “M1” money supply, which includes domestic currency in circulation and demand deposits in Egyptian pounds, jumped by 31.1 per cent in the year to the end of June 2024, after growing 33.4 per cent in the fiscal year to the end of June 2023 and 23.1 per cent in the fiscal year 2021/22.

The sharp acceleration in money supply growth has come during four years in which Egypt’s underlying economic weaknesses have been exposed by a series of shocks, including the Covid-19 pandemic and the war in Ukraine. Headline inflation, however, declined from a record 38.0 per cent in September to 25.7 per cent in July.

“If anything, M1 money supply in per cent year-on-year terms has slowed from its peak of nearly 50 per cent in February, which may be adding to the momentum of price changes (such as the decline in food inflation) in driving the headline rate of inflation in Egypt down over the course of this year,” explained James Swanston of Capital Economics.

As of the end of June, the central bank had 1.36 trillion Egyptian pounds outstanding in securities purchased from the finance ministry, up from 1.09tn a year earlier, according to its budget released on Tuesday. These included 940.3 billion pounds in local currency bonds purchased from the finance ministry as of the end of June, up from 818.9bn pounds in June 2023.

Egypt pledged to the International Monetary Fund in an $8bn financial support agreement signed in March that it would reduce central bank lending to the government. However, the government missed its targets in April and May after funds from the UAE’s $35bn purchase of the development rights to property on the Mediterranean coast were delayed, the IMF said in a review of the package published in July.

The regime in Cairo also promised that the central bank would stop sidestepping the finance ministry by lending hundreds of billions of pounds to other government agencies. Such lending fell to 766.8bn pounds as of the end of June from 887.6bn pounds a year earlier, according to the central bank budget. The government pledged to the IMF in June that it would reduce such borrowing by other government agencies by 150bn pounds by the end of June and by 100bn pounds in subsequent years until it had fallen to zero.

Government spending has surged in recent years as the state has pursued ambitious infrastructure projects, including new cities and a vast expansion of roads, while seeking to sustain some subsidies in order to prop up sliding living standards.

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