Egypt's Central Bank Lending Fuels Economic Concerns Despite Declining Inflation

Egypt's central bank increased its lending to the government last fiscal year, despite a decrease in inflation from a peak in September. Economists warn that such lending could harm the economy by expanding money supply, increasing inflation, and weakening the exchange rate. Government spending remains high as ambitious infrastructure projects continue.

Egypt's central bank has significantly increased its lending to the government in the last fiscal year, according to the latest annual budget from the central bank. This has occurred even as inflation rates have declined from their record high in September.

Economists caution that the central bank's ongoing lending practices risk undermining Egypt's economic stability. Expanding the money supply could lead to higher inflation and weaken the Egyptian pound against foreign currencies. Central bank reports reveal that 'M1' money supply, encompassing domestic currency in circulation and demand deposits, surged by 31.1% as of end-June 2024, a slight decrease from the previous fiscal year's 33.4% growth.

The rapid increase in money supply growth comes amid four years of economic vulnerability triggered by the COVID-19 pandemic and the war in Ukraine. However, headline inflation has dipped from a historic 38.0% in September to 25.7% by July. Despite a pledge to the IMF to reduce central bank lending, the latest budget figures indicate continued high levels of government borrowing to finance expansive infrastructure projects.

(With inputs from agencies.)