Egypt central bank expands lending to government, but inflation slows

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Lending to the government by Egypt’s central bank continued to climb in the last fiscal year, according to the central bank’s newly released annual budget, even as inflation has slid from an all-time peak in September.

Economists say central bank lending risks undermining the economy by expanding the money supply, fuelling inflation, and weakening the exchange rate against foreign currencies.

Central bank figures show “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 end-June 2024, after growing 33.4 per cent in the fiscal year to end-June 2023 and 23.1 per cent in fiscal 2021/22.

The sharp acceleration in money supply growth has occurred during four years in which a series of shocks, including the COVID-19 pandemic and the war in Ukraine, have exposed Egypt’s underlying economic weaknesses.

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,” James Swanston of Capital Economics said.

As of the end of June, the central bank had EGP1.36tn outstanding in securities purchased from the finance ministry, up from EGP1.09tn a year earlier, according to its budget, released on Tuesday.

These included EGP940.3bn in local currency bonds purchased from the finance ministry as of end-June, up from EGP818.9bn in June 2023.

Egypt pledged to the International Monetary Fund, in a $8bn financial support agreement signed in March, that it would reduce central bank lending to the government.

However, the IMF said in a July review of the package that it 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.

Egypt 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 EGP766.8bn as of the end of June from EGP887.6bn a year earlier, according to the central bank budget.

Egypt pledged to the IMF in June that it would reduce such borrowing by other government agencies by EGP150bn by the end of June and by EGP100bn 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 to prop up sliding living standards.

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