Roshta Obour.. Hani Tawfik: We need to reduce interest and hot money

02:41 PM

Thursday 05 May 2022

I wrote – Shaima Hefzy:

Hani Tawfik, an economist, said that hot money exited emerging markets “without return” after the US Federal Reserve’s decision to raise interest rates and the subsequent European hike, noting that the only bet capable of mitigating the impact of this on Egypt would be to create job opportunities and increase employment.

Tawfik expected, in a telephone interview with Masrawy, that the Central Bank would resort to raising interest rates in Egypt between 1 to 2%, but he believes that this is not a solution to confronting inflation, “mostly imported,” but the solution lies in encouraging investors to expand and industrialize, and this requires a direction opposite to the interest rate cut.

And the text of the interview.

How do you see the decision to raise the US interest rate by 0.5%… and why is gold and stocks rising?

The decision to raise the interest rate by 0.5% – which was expected – was long overdue, and the US Central Bank did not deal with the speed required to confront the high inflation because the high inflation made the real interest rate negative.. As for the market reaction, which seems opposite to what we are used to, it is normal when interest rises Markets and gold are declining, but we have to note that more important than the Fed’s decision to raise or lower interest rates is the message it sends to the markets, and this time that the Fed is aware of the situation and is continuing its steps steadily.

In terms of the economic health of the US economy, this means that things will return to normal. Investors are optimistic about the economy’s recovery and a return to growth.

Will high inflation and interest lead to global stagflation?

We cannot predict as long as the war continues, there is an increase in refugees to Europe, supply chains are disrupted, there are many variables, there is a global slowdown, a global recession, inflation and interest rate hikes, but we cannot predict when or where stagflation will start.

And what about Egypt?

We are an importing country. Inflation will rise locally due to the rise in global inflation and the deterioration of the value of the pound against the dollar and the basket of currencies that rise after 40% of the hot money left in one month, and our ability to stabilize the exchange rate has become difficult, and there will be an increase in the value of goods and services.

On the other hand, whenever we raise the interest rate, we reduce investment and withdraw liquidity to the banks, and the purchasing power of people decreases as a result of linking money in deposits. This will be accompanied by stagnation and with the presence of inflation we will reach an inflationary stagnation.

Does global inflation affect exports?

The impact of inflation on exports will vary in a sectoral manner, meaning that the effect may be limited or reverse to a positive effect if we are exporting gas, oil and raw materials with the increase in the prices of these commodities globally, but if we are talking about finished exports such as furniture, they will be affected by foreigners’ spending on these commodities and the ability to The Egyptian product is competitive in light of the high production costs and what the industry faces in the local market, and therefore the impact of each sector will be reflected on the total exports according to its relative weight in the total.

How do you see the external situation in light of these changes?

What could worry us in the future is tourism revenues, especially with the irregular flights and the return of Covid in China, in addition to the impact of incoming tourism from Russia and Ukraine, in addition to the decrease in remittances of workers abroad as a result of the emergence of individuals who can buy dollars from expatriates at a higher price than the bank, especially with the need for expatriates to help Their families face higher prices.

In addition, we face the necessity of borrowing, because we have a continuous deficit in the balance of payments, especially with the rise in inflation. We must rationalize consumption.. We must rationalize imports, because even if we borrow from the IMF – and we are the second largest borrower from the Fund – what will we do? We had previously borrowed $20 billion, and yet we fixed the exchange rate – so in addition to borrowing, it is necessary to reconsider the economic thinking of the country, and to seek the assistance of a ministerial group or an independent group of experts to develop an exit plan with different mechanisms from what we have previously implemented.

How do you expect the movement of the dollar against the pound in Egypt?

First, two rates for the dollar must be allowed. We know that the price of the dollar in the parallel market – which is not intended for money exchangers – trades between 19 and 20 pounds, while banks do not accept dollars from outside the banking system, and this is another mistake from the banks.

The best at this time is to allow the collection of dollars from people’s hands to be with the banks, and to make available two prices for the dollar, a price in the banks used to import basic commodities that are needed by the market. that.

In normal cases, I do not support two prices for the dollar, but currently your brother is forced, not a hero. For there to be two prices for the dollar – and this happened in many years – is better than people being unemployed. It is a necessary evil for us to choose the best of the bad ones.

Do you expect to raise interest rates in Egypt after the Fed’s decision?

I expect the Central Bank to raise interest rates between 1 to 2%, but I see that this is not a solution to the situation in Egypt because the Central Bank raises interest rates and has an eye on hot money, but it will not come. The central bank will not be able to continue providing the free gift by fixing the exchange rate, which is a situation that will affect all emerging markets. Foreigners have returned to their safe havens and will not return to us again, and not all inflation is raised to the interest rate. In America, demand is increasing and employment rates are increasing and therefore they are reluctant The demand is through raising the interest. As for us, inflation is imported because it is the result of higher prices and an increase in the cost of revenue.

So what is the alternative to raising interest rates?

Encouraging investment by reducing interest and not vice versa. Currently, raising interest rates has paralyzed liquidity in banks, and I am against high-return certificates, which amounted to 18% because targeting non-dollarization is a short-term view, because banks lose greatly due to the accumulation of funds and investors do not expand, and this is a matter It must stop.

Investment must be encouraged and its obstacles removed. This is not the time to sell land or raise the cost of electricity and taxes. On the contrary, we must take advantage of the liquidity in the Gulf and its differences with America to open joint industries, and not just get quick dollars.

It is necessary to restructure the economic thought of the entire state administration, and to adopt a balanced growth plan, not the growth of one sector, because not all people work in contracting and construction, a sector of which the developmental return comes in the long term. We need to operate and reconsider spending priorities.

How can the impact of inflation on citizens be mitigated?

By adopting monetary and financial flexibility, cooperating with those affected by inflation through social protection programs with cash support, even in the event of a deficit in the public budget. Supporting the affected groups is a necessity, and for these reasons, budget and reserve deficits were found.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.