IMF: High Interest Rates Impose Pressure on Banks in MENA Region

International Monetary Fund (IMF) Analysts suggested that the central banks in the countries of the Middle East, North Africa (MENA) and Pakistan continue to apply higher interest rates for a longer period, especially in economies that are witnessing a chronic rise in basic inflation levels (except for food and energy prices).

They said in a recent post on the IMF website, that the high interest rate environment, which recently caused pressure across the banking sectors in a number of advanced economies, warns of more regular risks.

They added that this environment could lead to tightening financial conditions, stirring a wave of credit pressure, and reducing the available funding for financial institutions, including in the MENA region and Pakistan.

These pressures may also threaten bank profits and their willingness to lend, which will have tangible implications for financial stability and economic growth.

They said that in light of the risks threatening financial stability, such as the great dependence on external financing, banks in a number of countries may become vulnerable to sudden transformations in the mood of investors.

In the two countries where the lending authorities possess a large share of the local sovereign debt, the elongation of the higher interest rates may lead to losses, especially in the event of a decline in the market value of these debts and the decrease in asset prices, according to the experts of the fund.

In the latest versions of the Fund from the report of the regional economy prospects for the Middle East and Central Asia, issued in October, details of the first test that was conducted to measure the region's ability as a whole to bear the pressure, and the test uses four scenarios to assess the risk of high interest rates for a longer period in the countries of the emerging markets and medium income countries across the region and the six Gulf Cooperation Council (GCC) economies.

The results indicate that banks across most countries of the region will be able to withstand in the face of individual pressure scenarios, but they may become at stake if interest rates are associated with pressure on the companies and liquidity sector.

It should be noted that banks owned by countries are more likely to be risky compared to private sector banks. This is due to the low profitability and high securities in state -owned banks, which increases the risk of interest rates.

The Fund experts emphasized that policy makers in the countries of the region must find the tools appropriate to address the disturbances of the banking sector that may affect financial stability.

They pointed out that risk management can be strengthened by tightening precautionary standards - including encouraging banks to accumulate capital during periods of economic expansion so that they can continue lending during drops.

They added that the ability tests should be taken into account by weaknesses caused by government debt possessions to banks to enhance their strength in the face of shocks.

During the next few years, policymakers in the countries of the region should continue their efforts to support the deepening of the investor base and its diversification to reduce the strength of the link between the safety of the banking and government entities.

It is also necessary to find a set of emergency liquidity tools, such as emergency lending from central banks to eliminate regular financial pressures.

However, governments have to communicate clearly to ensure that supporting liquidity is not seen as contrary to the purposes of monetary policy.

Countries should also develop effective plans to liquidate troubled companies to reduce the threats to financial stability and economic growth.

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