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Egypt Banking, Credit, and Inflation
Like other economic sectors, banking fell under government
control during the Nasser era. Banks were nationalized and
amalgamated in 1963 into four big commercial banks: the National
Bank of Egypt, the Bank of Alexandria, Bank Misr, and the Bank of
Cairo. They were owned and regulated by the Central Bank. Numerous
special-purpose banks were also created, including those for
industrial and agricultural credit, mortgages, and social security
funds. They held about 9 percent of total assets of the banking
system.
When Law Number 43 (of 1974) for Arab and Foreign Capital
Investment and Free Zones was extended to the domestic private
sector, banking boomed and its structure was altered. The number of
banks grew between 1974 and 1988 from 8 to more than 100.
Furthermore, banking absorbed a big chunk of investment outlays. In
1983, for example, 54 percent of the ŁE2.1 billion capital
investment went into banking and associated financial activities.
The banking sector thrived because the Central Bank allowed a
highly profitable mark-up of 6 percent over fund costs of banks,
pushing banking investment returns to about 70 percent, probably a
higher rate of return than in any other sector. The most important
change in the banking structure was the emergence of three types of
establishments: private, joint venture, and, after 1984, Islamic
investment companies. Nevertheless, the big four banks, partly
because they had branches throughout the country, continued to
handle about 60 to 70 percent of total assets.
Banks were highly liquid throughout the 1980s. Time and foreign
currency deposits increased from nearly ŁE3.6 billion to nearly
ŁE34 billion between 1980 and 1988, or at an annual rate of 32.4
percent (see
table 5, Appendix). Part of the increase came from the
revaluation of foreign currency deposits against the depreciating
pound
(see Exchange Rates
, this ch.). The largest shares of the
increase, were those of time deposits and foreign currency. It was
difficult to determine the savings rate, because the Central Bank
did not separate time deposits from foreign currency. Some
estimates showed that Egypt had a savings rate of 17 percent of
GNP, one of the highest in the world. This was mostly private
savings; public savings fell considerably in the 1970s and 1980s
because of military expenditures, the high cost of subsidies, and
the growth of foreign debt.
The generally good performance of the banking sector was marred
by corruption, embezzlement, smuggling of hard currency abroad, and
a stormy confrontation between the government and the Islamic
investment companies. In one case in 1984, a black marketer was
able, through bribery, to obtain loans worth US$3 billion and then
to smuggle the funds abroad. It was estimated that in 1981 about 54
percent of hard currency deposits in private banks were placed with
overseas branches or corresponding banks. The government believed
there were ŁE40 to ŁE70 billion abroad, which either had flowed out
of, or never flowed into, the country
(see Remittances
, this ch.).
Islamic investment companies came into being in 1984 and were
dominated by four or five major enterprises. They grew
spectacularly and accumulated deposits totaling billions of
dollars. Their practices differed from those of other banks in that
they offered depositors risky open-ended mutual fund certificates
instead of interest, which Islamic law forbade as usury. Initially,
they were able to offer depositors returns of 20 percent. The
government, and many observers, accused them of being able to do so
through black-market money trading and by luring depositors with
"pyramid" schemes, such as the establishment of fictitious
corporations, by which dividends were paid from old investments.
They were also charged with smuggling large sums of hard currency
abroad and with defrauding many depositors. The government issued
new regulations in 1988 that required the companies to reconstitute
themselves as stockholding enterprises, issue share certificates,
and place deposits under official scrutiny. Whether the companies
would submit to such regulations remained unclear. It was feared
that if they refused and liquidated themselves instead, they could
cause havoc in the financial market.
The increase in bank liquidity was reflected in the growth of
credit. Banks were permitted to lend only 60 percent to 65 percent
of the value of their deposits, except to the government, which
could borrow at will. The value of loans grew steadily in the
1980s, increasing as much as 20.7 percent per year. Part of the
increase resulted from the depreciation of the pound. The highest
loans were consistently to the government, which borrowed heavily
to finance its chronic deficit. Government borrowing represented
from 40 percent to 60 percent of the total. Public sector
enterprises, although they received direct funds from the
government budget, were the second-largest borrower until the mid1980s .
After 1985 the private sector replaced the public sector as the
second largest debtor after the government. By the second half of
the 1980s, private borrowers were becoming less and less able to
honor their obligations. As a result, banks, especially some
foreign and joint venture banks that were not allowed to deal in
local currency, faced a depressed business atmosphere.
Nominal interest rates remained essentially the same through
most of the 1980s. They ranged from 5 to 13 percent for deposits
and 11 to 17 percent for loans. That real interest rates were
consistently negative because of higher inflation rates apparently
did not lead to excessive borrowing by the public sector. In spite
of IMF insistence on raising interest rates, the government was
reluctant to increase them by more than 1 percent to 2 percent, for
fear of slowing economic growth.
The increase in the money supply probably also contributed to
the rise in inflation levels. Total money supply increased between
1980 and 1988 at an annual rate of 23 percent. Major sources of
this increase were government borrowing, revaluation of foreign
currency holdings, and private-sector borrowing. Double-digit
inflation marked the economy in the 1980s. The consumer price index
rose by 336 percent between 1980 and 1988, or at an annual rate of
16 percent, about 5 to 6 percentage points higher than the rate in
the 1970s. Since 1987, annual inflation rates have risen between 20
percent and 30 percent. Economists spoke of "stagflation," the
combination of low growth and high inflation, as characterizing the
Egyptian economy in the second half of the 1980s.
Data as of December 1990
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