Egypt's Domestic Liquidity Jumps 19% due to lower Interest Rates

The Central Bank’s monetary policy report revealed that the average rate of domestic liquidity recorded a growth rate of 18.8% during the period between April 2020 and April 2021, compared to a growth of 12.6%, year-on-year.

The local liquidity growth rate recorded 19.1% in April, after it recorded an increase for the 7th quarter in a row. Liquidity reached an average of 19.9% during Q1 of 2021 and 19.6% during the Q4 of 2020.

The report revealed that the rise was supported by a drop in both the contribution of financing to the state's public deficit, in addition to the decrease in the contribution of liabilities on the private sector.

It added that the growth in domestic liquidity was non-inflationary, as it was not matched by a direct increase in the nominal GDP or the inflation rate in the first nine months of the fiscal year 20/2021 due to the low rate of money turnover that reflected the slowdown in economic activity during corona and the accompanying containment measures.

This rise was supported by the Central Bank of Egypt’s decision to reduce interest rates by 400 basis points during 2020, starting from March 2020, in addition to reducing interest rates on the initiatives of the central bank that were announced in late 2019 and early 2020 to reduce the expected negative effects of the pandemic.

Similarly, the annual growth rate of private sector liabilities in local currency slowed down after neutralizing the effect of inflation during April 2021, compared to the previous three quarterly periods.

As for the components of domestic liquidity, all indicators of cash circulating outside the banking sector recorded stability in Q1 of 2021 and in April of 2021, after witnessing a slight increase following the outbreak of the pandemic, in parallel with the easing of precautionary measures on the part of the Egyptian government.

It should be noted that the ratios of cash circulating outside the banking system still range at historically below average levels, even after rising in the Q2, Q3 of 2020.

At the same time, the dollarization rate of deposits in foreign currency as a percentage of total deposits in domestic liquidity stabilized in April of 2021.