Central bank withdraws over LE1 trillion from banks in monetary tightening move after dollar influx

The Central Bank of Egypt has withdrawn around LE1.05 trillion (US$22.4 billion) from commercial banks through open market operations, it announced on Tuesday.

The measure is intended as a means to control the inflationary impact of Egypt’s increased money supply, as the country receives a huge influx of liquidity due to the landmark Ras al-Hikma agreement and renewed faith in the economy due to the reforms undertaken by the state, analysts told Mada Masr. 

The withdrawal via open market operations is a means of furthering a contractionary monetary policy in line with international recommendations for Egypt to control inflation, they said. 

The central bank can sell securities in weekly auctions to domestic banks, which purchase the securities by making deposits at the central bank. 

Since April 23, the central bank has gradually intensified its monetary tightening by withdrawing liquidity from the market, starting with LE460.8 billion. Then, the following week, it kept the original sum and withdrew more, bringing the total to LE 667.25 billion. By the last auction, on May 14, the central bank had brought the total liquidity it withdrew from banks to LE 1.05 trillion, according to central bank data and a commentary note by Naeem Holding for Investments obtained by Mada Masr.

The bank also announced a new auction on Tuesday worth LE395 billion, according to the Naeem memo. 

The decision brings the amount the central bank aims to withdraw in liquidity from the banking system by next week to over LE1 trillion.

Concurrently, the agency has increased the value of the reserves that banks are required to deposit at the central bank by about LE60 billion, bringing the total banking deposits it holds to LE733 billion, according to the Naeem memo.

Macroeconomic analyst Mona Bedeir told Mada Masr that over the same period, the central bank also changed regulations on how it conducts weekly securities auctions. The changes allowed the central bank to accept all the bids it receives from domestic banks in response to its weekly tender.

Since mid-April, central bank liquidity has risen significantly, reaching LE460.8 billion on April 23, LE667.25 billion on April 30, and ultimately exceeding LE1 trillion on Tuesday, according to central bank data.

The bank’s steps to further its contractionary monetary tools came alongside a significant influx of foreign currency liquidity entering Egypt. 

The government announced in February the conclusion of the landmark $35 billion Ras al-Hikma deal with the United Arab Emirates. This was followed by a series of economic reforms, undertaken partly to meet the recommendations of an ongoing loan program with the International Monetary Fund, following which the IMF paid out suspended installments of the loan. The steps also renewed investor confidence in Egypt’s economic stability, improving the performance of the country’s treasury bills.

Egypt received US$24 billion from the Ras al-Hikma deal, along with $11 billion in Emirati deposits that were converted into local currency, injecting liquidity into the economy, said a financial analyst at an investment bank who spoke to Mada Masr on condition of anonymity.

"A total of $35 billion, which translates to LE1.6 trillion, suddenly entered the economy in recent months, in addition to foreign investments in Egyptian debt instruments, such as bonds and treasury bills, of around LE541 billion since March, totaling about LE2 trillion," the analyst said. "The central bank had to take measures to prevent them from turning into demand that fuels inflation."

Bedeir likewise pointed to the influx of liquidity as the reason for the central bank’s policy steps. 

The central bank is expected to pursue a policy of monetary tightening over the coming months. Cash liquidity withdrawals are likely to continue to increase throughout the current year until the economy rebounds and inflation subsides, said Bedeir. 

Reducing liquidity in the banking system was a key request from the IMF, which urged the government to tighten monetary policy as much as possible until a substantial cash reserve in foreign currencies is established, said the financial analyst. 

Open market operations are being used due to the diminished attractiveness of treasury bills and bonds due to ongoing profit reduction, according to the Naeem research note, which added that the central bank will continue its liquidity withdrawal policy from the market, particularly in light of the continuous growth in foreign investment inflows.