Monetary Policy Report March 2017

Transcription

1 Central Bank of Egypt Monetary Policy Report March 217 Monetary Policy Committee Monetary Policy Report, March 217 Central Bank of Egypt

2 Central Bank of Egypt This document is the first Monetary Policy Report published by the Central Bank of Egypt. Its objective is to increase transparency regarding the assessment of initial economic conditions as well as provide an outlook of expected future economic developments that underpin monetary policy decision-making. The Central Bank of Egypt considers enhanced transparency and communication with all stakeholders as an integral part of achieving its price stability mandate. The Monetary Policy Report will be published four times a year. This report was prepared by the staff of the Monetary Policy Sector and approved by the Monetary Policy Committee. Some of the data presented in the report are preliminary and subject to revisions. The cut-off date for the statistics included in this report is March 15, 217. Monetary Policy Report, March 217 Central Bank of Egypt 1

3 Table of Content THE INITIAL CONDITIONS PAGE 3 THE OUTLOOK... PAGE 19 MONETARY POLICY STANCE. PAGE 2 APPENDIX: TABLES AND ABBREVIATIONS PAGE 21 Monetary Policy Report, March 217 Central Bank of Egypt 2

4 Oct-7 May-8 Dec-8 Jul-9 Feb-1 Sep-1 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Figure 1 Headline and Core Inflation (in %, y/y, weights in parenthesis) Headline CPI (1%) Core CPI (74.4%) Source: Central Agency for Public Mobilization and Statistics and Central Bank of Egypt. Figure 2 Monthly Contribution to Headline Inflation (in %, m/m) Source: Central Agency for Public Mobilization and Statistics and Central Bank of Egypt. Figure 3 Diffusion Index: Headline Inflation by Number of Items that Experienced Price Changes (in %) Regulated Items Food Prices Services Fruits & Vegetables Retail Prices Price increases Price decreases Net Source: Central Agency for Public Mobilization and Statistics and Central Bank of Egypt The Initial Conditions a) Inflation has been mainly driven by cost-push pressures that are gradually receding. Headline monthly inflation in February 217 decelerated to 2.6%, after averaging 4.% over the previous three months. The elevated monthly inflation rates, however, led the annual rate to record 3.2% in February. Inflation expectations stemming from a history of 1% inflation as well as transitory cost-push factors reflecting side-effects of the economic reform measures on November 3, 216 represent the main reasons for the high inflation, whereas inflationary pressures stemming from economic activity remained limited. Inflation was further affected by upward adjustments of regulated prices, higher custom tariffs, supply shocks in certain commodities notably rice and sugar, as well as the introduction of the value added tax at a higher rate vis-à-vis the sales tax. Moreover, seasonal effects impacted the prices of fresh fruits and vegetables in February 217. Following the generalized price increase in November 216 that affected more than half of the items in the CPI basket, the share of the items that experienced price increases narrowed gradually to register 19% in February 217. In line with that, it is estimated that the impact of the depreciation of the exchange rate during November and December 216 has been gradually declining. February inflation supports the argument that most of the impact of the transitory cost push effects is likely to have materialized. It is worth highlighting that the pickup of the monthly inflation rate in January 217 following its drop in December 216 reflected regular seasonal effects. Core items continued to experience the largest price increases, which led monthly core inflation rates to record a higher average compared to headline inflation at 4.9% in the three month prior to its drop in February 217 to 2.6%. Accordingly, annual core inflation rose to 33.1% in February. While the contribution of food prices remained elevated between November 216 and January 217, the contribution of the prices of retail items and Monetary Policy Report, March 217 Central Bank of Egypt 3

5 Feb-8 Nov-8 Aug-9 May-1 Feb-11 Nov-11 Aug-12 May-13 Feb-14 Nov-14 Aug-15 May-16 Feb-17 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Figure 4 Tradable Goods and Egypt s Nominal Effective Exchange Rate (in %, y/y) NEER (actual depreciation = increase, RHS) Tradables (LHS) services declined following their inch up in November. Especially prices of red meat, poultry, fish, pulses, sugar, wheat, maize as well as oil and fats were strongly impacted by the exchange rate depreciation. In the services sector, prices of cafes and restaurants, inland transportation as well as health related services were the main drivers. Retail items were especially impacted by higher prices of medical products, vehicles and related products, clothing and personal care products, as well as household appliances and cleaning products. Source: Central Agency for Public Mobilization and Statistics and Central Bank of Egypt. Figure 5 Developments of International Commodity Prices (Index, 25 = 1) Food Energy Globally, there has been some firming of international commodity prices affecting prices of tradable items in the domestic CPI basket, which largely encompass food items. International food prices using domestic CPI weights rose by 17% (y/y) in February 217, while domestic core food prices rose by 45.4% (y/y). The higher magnitude domestically is partly driven by the significant exchange rate depreciation. Especially May (4.% m/m), November (6.4% m/m), December (7.% m/m) and January (8.1% m/m) witnessed the largest increases, driven by the significant depreciation in the nominal effective exchange rate (NEER) in March (9.5% m/m), April (6.5% m/m), November (76.6% m/m) and December (15.2% m/m). Source: International Monetary Fund. After peaking in January 217, prices of core food as well as tradable items more generally registered in February the lowest monthly increase since October 216. In the meantime, the monthly increase of prices of nontradable items has been gradually dropping since December 216, strengthening the argument that the factors currently driving inflation are temporary in nature and will diminish, supported by a tight monetary policy stance. b) The global environment supported weak albeit strengthening pressures on domestic prices, but challenges competitiveness due to adverse inflation differentials. International commodity prices were on upward trend between February 216 and February 217, driven by Monetary Policy Report, March 217 Central Bank of Egypt 4

6 Feb-3 Feb-4 Feb-5 Feb-6 Feb-7 Feb-8 Feb-9 Feb-1 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Oct-7 Jun-8 Feb-9 Oct-9 Jun-1 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Feb-17 Dec-7 Jul-8 Feb-9 Sep-9 Apr-1 Nov-1 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Figure 6 Real GDP Growth in Advanced Economies (in %, y/y) Source: Bloomberg. Figure 7 Inflation in Advanced Economies (in %, y/y) Source: Bloomberg. United States Japan Japan United Kingdom Euro Area United States Euro area UK Figure 8 Egypt s Inflation Differential with its Main Trading Partners (in %, y/y) Source: Bloomberg and Central Bank of Egypt calculations. higher crude oil prices which rose significantly in December 216 following OPEC's meeting to coordinate production cuts on November 3. Nevertheless, prices were lower during the first nine months of 216 compared to the same period a year earlier and the annual increase began to take place since 216 Q4. Other than the mild firming of international commodity prices, the global economic environment supported weak, albeit strengthening pressures on domestic prices. Low global inflation and subdued global growth, albeit recovering, supported low cost-push and demand-pull pressures on domestic prices, respectively, while the synchronized recovery is setting the stage for monetary policy normalization. Despite lower annual real GDP growth in advanced economies in 216 compared to 215, it came out slightly better in 216 Q4 compared to 215 Q4. While the pace of annual output growth in the UK and Japan increased, it stabilized in the US and slowed down in the euro area. In emerging economies, annual growth in 216 was roughly the same as in 215, with somewhat better outturns in 216 Q4 compared to 215 Q4. During this period, output growth in China was broadly the same, while that of India improved. After bottoming in September 215, annual headline inflation continued to recover in advanced economies during the first months of 217, hovering around the 2%- mark in the case of the UK and the euro area, while registering 2.7% in the US during February and.4% in Japan during January. Meanwhile, annual headline inflation in emerging economies has been generally on a downward trend since November 215, recording.8% and 3.7% in China and India in February 217, respectively. Egypt, however, has witnessed an upturn in annual inflation since May 216 that was further amplified by the economic reform measures in November 216. This resulted in a higher inflation differential between Egypt and its trading partners which impacted Egypt's Monetary Policy Report, March 217 Central Bank of Egypt 5

7 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Feb-17 Figure 9 Trading Partner Currencies Against the USD (in %, y/y, increase is depreciation) 2% 15% 1% 5% % -5% -1% -15% Source: Bloomberg and Central Bank of Egypt calculations. Figure 1 Non-oil Trade Balance (in USD billion) Figure 11 Oil Trade Balance (in USD billion) Non-oil exports (LHS) Non-oil imports (RHS) Oil imports (LHS) Oil exports (LHS) Brent oil price (USD/barrel, RHS) Source: Central Bank of Egypt and International Monetary Fund competitiveness adversely. Nevertheless, the adverse impact was more than offset by the annual NEER depreciation since 216 Q2 and especially in 216 Q4 and 217 Q1 in light of the foreign exchange market liberalization and the associated depreciation of the Egyptian pound, which yielded a more competitive real effective exchange rate (REER), despite the annual depreciation of trading partner currencies vis-à-vis the USD. c) Balance of payments (BoP) dynamics exerted pressure on the Egyptian Pound and international reserves under the managed exchange rate regime, resulting in foreign exchange controls, the emergence of parallel markets, and continuous cost-push inflationary pressures. This strategy has proven unsustainable and led the CBE to liberalize the foreign exchange market on November 3, 216, thereby tolerating only transitory inflationary pressures while gaining the benefits of external sustainability. Despite the somewhat weaker annual economic growth in advanced economies in 216, the annual REER depreciation that took place since 216 Q2, along with other trade-balancing measures, coincided with the improvement of the non-oil goods trade deficit compared to the respective quarters of the previous year. On average, between 216 Q2 and Q4, the upturn in exports was the main contributor to the improvement in the nonoil trade deficit, recording USD 3.8 billion, the highest since June 211. Furthermore, non-oil exports in 216 Q4 alone recorded the highest annual improvement since 28 Q1. Meanwhile, non-oil imports averaged USD 11.7 billion, flat compared to the same period a year ago. Furthermore, after a notable improvement of the oil trade deficit in the first three quarters of 216, the improvement narrowed substantially in 216 Q4, partly reflecting international oil price developments. The annual improvement in the goods trade balance between 216 Q2 and Q4 corresponded with a Monetary Policy Report, March 217 Central Bank of Egypt 6

8 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 23/4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 211/12 212/13 213/14 214/15 215/16 26/7 27/8 28/9 29/1 21/11 211/12 212/13 213/14 214/15 215/16 Figure 12 Suez Canal Indicators (in %, y/y, unless otherwise stated) Suez Canal Tolls (USD billion, LHS) Suez Canal net tonnage (RHS) World trade volume of imports (RHS) Source: Central Bank of Egypt and International Monetary Fund. Figure 13 Private Workers Remittances (in %, y/y) Source: Central Bank of Egypt and International Monetary Fund. Figure 14 Net Tourism Inflows and the Services Balance (in USD billion) Nominal GDP growth in the GCC (LHS) Private remittances (RHS) Source: Central Bank of Egypt and International Monetary Fund Net tourism inflows (receipts minus payments) Services balance deterioration in the services balance 1, with the improvement of the former offsetting the latter s deterioration only during 216 Q4. Generally, developments in net tourism receipts have been the leading driver of the outturn of services balance. Nevertheless, despite the recovery in annual terms of net tourism receipts during 216 Q4 for the first time since 215 Q2, the services balance continued to deteriorate in the same quarter largely on the back of an annual deterioration in other services payments (which include transfers by international oil companies and payments of international construction services). Taken together and excluding net investment income, the sustained annual deterioration since 214 Q4 in net exports of goods and non-factor services (NEGS) almost diminished between 216 Q2 and Q4. Meanwhile, remittances from Egyptians working abroad rebounded substantially in 216 Q4 to record USD 4.6 billion, the highest since 215 Q2, after bottoming at USD 3.4 billion in 216 Q3, the lowest since 211 Q1. January 217 data show a continued annual improvement. Generally, the estimated decline of nominal GDP growth of Gulf Cooperation Council (GCC) member countries in 215 and 216, as well as the emergence of parallel foreign exchange markets during the previous exchange rate regime, had adversely impacted private workers' remittances. Against this background, the annual deterioration in the current account deficit narrowed substantially between 216 Q2 and Q3, turning into an annual improvement in 216 Q4. This marks the first annual improvement since 214 Q1. The capital and financial account recorded USD 24.2 billion between 216 Q2 and Q4, an improvement by USD 6.8 billion compared to a year earlier. While the liquidation of commercial banks net foreign assets lessened, medium and long-term loans as well as suppliers credit rose to offset the decline in short-term suppliers credit, net foreign investment in Egypt 1 Including the investment income balance. Monetary Policy Report, March 217 Central Bank of Egypt 7

9 Jun-6 Mar-7 Dec-7 Sep-8 Jun-9 Mar-1 Dec-1 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Figure 15 Net Foreign Direct and Foreign Portfolio Investments in Egypt (in USD billion) Direct Investment In Egypt (net) Portfolio Investment in Egypt (net) increased, including both net foreign direct investment (FDI) as well as portfolio investment in spite of the repayment of the Qatari bond, and outflows from nonbank foreign assets diminished. Higher medium and long-term loans reflected the World Bank's 1 st tranche of the development finance loan (USD 1. billion) as well as the International Monetary Fund s (IMF) first tranche of the USD12 billion extended arrangement under the extended fund facility (EFF, USD 2.7 billion). Figure 16 Net External Borrowing of the Government and the Private Sector (in USD billion) Short term suppliers credit (net) Medium term loans and suppliers credit (net) The merits of the new exchange rate regime were further reflected in higher net inflows into Egyptian T-Bills and equities, increasing by a cumulative USD1.3 billion between 216 Q2 and Q4, most of which during Q4 where it registered the highest net inflows since 21 Q3. Leading indicators up to March 15 th, 217 show a further net increase of portfolio inflows to Egyptian securities of around USD 2.7 billion during 217 Q1 2. Similarly, net FDI inflows in Egypt recorded USD 5.3 billion between 216 Q2 and Q4, improving by USD 1. billion compared to a year earlier, most of which during Q4, where it registered the highest annual increase in USD billions since 215 Q1. Figure 17 Fundamental BoP indicator 1/ (in % of GDP) Global financial crisis Liberalization of the exchange rate regime Managed exchange rate regime 1/ Calculated as the sum of FDIs, FPIs excluding net inflows in bonds, current account deficit excluding official transfers and short term suppliers credit (net). Under the managed exchange regime, foreign investment excluding bonds as well as net short-term suppliers credit have been generally unable to finance the current account deficit excluding grants since 21 Q4, resulting in sustained fundamental deficits over most of the period to date. Portfolio investment during that period were hampered by the sum of the country risk premium as well as the anticipated exchange rate depreciation, which together have outweighed favorable interest rate differentials. This led to drainage of net foreign assets by commercial banks' and accumulation of liabilities by the CBE to provide foreign exchange to the market while minimizing the drop in gross international reserves, the depreciation of the Egyptian pound as well as the associated cost-push inflationary pressures. On November 3, 216, the CBE decided that this strategy 2 Using traded dates of portfolio inflows, which could differ from data releases using value dates. Monetary Policy Report, March 217 Central Bank of Egypt 8

10 Mar-1 Dec-1 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Figure 18 Labor Market Developments (in %, y/y) 6% 4% 2% % -2% -4% Employment (LHS) Labour Force (LHS) Real GDP (RHS) 8% 6% 4% 2% % -2% -4% -6% was unsustainable and liberalized the foreign exchange market. As a result, the fundamental deficit as defined above reversed to a surplus in 216 Q4, registering the highest since 21 Q3. Meanwhile, GIR were boosted by external support, recording USD 26.6 billion in February 217, the highest since June 211, increasing the coverage of expected imports of goods and non-factor services in 217/18. d) Real Gross Domestic Product (GDP) growth weakened compared to 214/15 and 215/16. Source: Central Agency for Public Mobilization and Statistics and Ministry of Planning. Figure 19 Contribution to Real GDP Growth by Expenditure (in pp, at market prices) Net Exports Investment Consumption GDP growth (market price, RHS) Average of 214/15 & Sep /16 Source: Ministry of Planning and Central Bank of Egypt. Figure 2 Contribution to Real GDP Growth by Sector 1/ (in pp, at factor cost) 4% 2% % -2% G. Gov. Suez Canal Trade Services Industry GDP growth (factor cost) Average 214/15 & 215/16 Agriculture Sep-16 Source: Ministry of Planning and Central Bank of Egypt. 1/ G. Gov stands for general government Compared to the period between 21/11 and 213/14 where real GDP growth averaged 2.3%, output strengthened between 214/15 and 215/16 to average 4.3%. The negative output gap prevalent since 211 is estimated to have narrowed during the previous two fiscal years, while potential output growth is estimated to have weakened. Moreover, the unemployment rate dropped from a peak of 13.4% in 213/14 Q2 to 12.5% in 215/16 Q4, which coincided with a drop in average real unit labor cost since 215. However, during 216/17 Q1, annual real GDP growth softened to 3.4% and the unemployment rate worsened slightly to 12.6%. The slowdown in GDP growth during 216/17 Q1 compared to the previous two fiscal years is attributed to the drop in domestic absorption, while outturns of net exports improved. The drop in domestic absorption was due to the slowdown in the contribution of consumption (both private and public), while that of gross fixed investment remained broadly the same. After being the main driver of growth historically, supported by the recovery of real claims on the household sector in 214/15 and 215/16, consumption saw its relative contribution to growth dropping markedly in 215/16 Q4 and 216/17 Q1. This coincided with an annual drop in real average wages affecting consumer purchasing power, and represents the beginning of the rebalancing of the GDP growth structure. Meanwhile, the contribution of gross fixed investment remained broadly the same in 216/17 Q1 compared to Monetary Policy Report, March 217 Central Bank of Egypt 9

11 Jun-3 Jun-4 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Figure 21 Tourism Developments (in %, y/y) Real growth tourism sector (GDP) Tourist arrrivals multiplied by tourist nights Source: Ministry of Planning and Central Bank of Egypt. Figure 22 Gross Domestic Investment and Claims on the PBS (real growth in %, y/y) 1% 8% 6% 4% 2% % -2% -4% -6% -8% Claims on PBS (LHS) Gross domestic investment (RHS) 3% 25% 2% 15% 1% 5% % -5% -1% -15% Source: Ministry of Planning and Central Bank of Egypt estimates. Figure 23 Composition of L/C Loans to PBS between July 216 and January 217* (in % of total PBS loans portfolio) Wholesale Trade Construction Materials Other Manufacturing Construction Tourism Communication Pharmaceuticals Electronics & Industrial Goods Automobiles Jan.17 Jul Non-oil logistics Food & Beverage Chemicals Financial Services Real Estate Agriculture Oil & Gas Textiles Transportation *Based on data sourced from 21 banks with 71% average market share of total loans to the PBS. the previous two fiscal years. However, private investment continued to recover and was offset by lower public investment 3. Public investment has taken the lead in 214/15 particularly due to the Suez Canal project. During 215/16 and 216/17 Q1, the contribution of private investment to growth has outpaced that of public investment, after weakening considerably in 214/15. Meanwhile, growth in imports weakened while that of exports increased in 216/17 Q1 compared to the previous two fiscal years, which lessened the negative contribution of net exports of goods and non-factor services to GDP growth, in line with nominal outturns in Egypt's current account during the same period. At the sectoral level, GDP at factor cost grew by 1.7% in 216/17 Q1, slowing down from the average 2.8% registered between 214/15 and 215/16. The slowdown came mainly on the back of the services sector, particularly tourism contributed significantly negatively. The industrial sector also weakened, mainly due to the manufacturing activity, particularly petroleum manufacturing. Meanwhile, the contraction of the extractions activity lessened, partly offsetting the weakening manufacturing activity, as the contraction of natural gas extractions narrowed markedly, overcompensating for the deterioration in oil extractions. In 216/17 Q2, leading indicators have generally improved, and preliminary figures for GDP growth at market prices registered 3.8%. The negative annual growth in the industrial production index and the PMI has bottomed since June 216 and December 216, respectively, and continued to recover thereafter, suggesting continued improvement in GDP growth. This coincided with a drop in unemployment rate to 12.4% from 12.6% in the previous quarter. Furthermore, annual growth of credit to the private business sector has been elevated between July 216 and January 217, particularly local currency credit, indicating a potential continuation of private investment growth 3 Using the same deflator for private and public investment as gross fixed capital formation. Monetary Policy Report, March 217 Central Bank of Egypt 1

12 3-Oct Oct-16 8-Nov Nov Dec-16 1-Jan Jan-17 6-Feb Feb Mar-17 Thousands 3-Nov Nov Nov-16 4-Dec Dec Dec-16 4-Jan Jan Jan-17 5-Feb Feb Feb-17 6-Mar Mar-17 Figure 24 Share of total change in new L/C lending to PBS* (in %) % Wholesale Trade Communication Electronics & Industrial Goods Food & Beverage Construction Materials Textiles Chemicals Oil logistics Transportation Financial Services Increase Other Manufacturing Oil & Gas Non-oil logistics Automobiles Construction Agriculture Pharmaceuticals Tourism Real Estate *Based on data sourced from 21 banks with 71% average market share of total loans to the PBS. that may offset weakening consumption growth, given the historic relationship between real growth of credit to the private business sector and gross domestic investment. 4 New lending to the private business sector in local currency during the period between July 216 and January 217 was mainly provided to the industrial sector this is followed by the trade sector, then the services and agricultural sectors. Within the industrial sector new lending was mainly afforded to the other manufacturing, oil and gas, electrical industries and electronics, food and beverage, automobiles and vehicles sub-sectors. Within the services sector, new lending was provided to the communication, non-oil logistics and construction sub-sectors. Figure 25 Excess Liquidity (in EGP billions) Variable Deposits Fixed-Rate Deposits Standing Facilities Figure 26 Overnight Interbank Market (in %, unless otherwise stated) O/N volumes (EGP billion, RHS) O/N Deposit Policy Rate O/N Lending Policy Rate O/N Interbank Rate Mid-Corridor Policy Rate 1 5 e) The recent tightening of monetary and financial conditions. The liberalization of the foreign exchange market and the associated depreciation and rise in inflation expectations have loosened monetary conditions, risking underlying inflationary pressures. The Monetary Policy Committee (MPC) pre-acted by raising its main policy rates 6 basis points in four out of eight meetings between December 27, 215 and November 3, 216, the latter being an extraordinary meeting where policy rates were raised by 3 basis points at the day of the foreign exchange market liberalization. The CBE further tightened conditions via the introduction of flexible rate auctions that have absorbed excess liquidity over maturities greater than 7 days. Meanwhile, during the last two MPC meetings that took place in December 216 and February 217, the committee decided to keep the main policy rates unchanged. Recently, monthly inflation developments show weak evidence of unanchored inflation expectations given a contained pass-through of the economic reform measures that appears to be gradually fading. Accordingly, the CBE's inflation forecast suggests the recovery of negative real interest rates using forward looking inflation, which along with the real exchange rate 4 Real claims on the private business sector are calculated as a function of two adjustments. Local currency claims were adjusted by the gross domestic investment deflator. Foreign currency claims were adjusted by using June 21 exchange rate. Monetary Policy Report, March 217 Central Bank of Egypt 11

13 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17* Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17* Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Figure 27 Interest Rates (in, %) Figure 28 Government's WACF 1/ (in, %) Mid-Corridor rate O/N interbank rate Overall deposit rate Overall lending rate WACF (net of tax) T-Bonds yield T-Bills yield Source: Central Bank of Egypt calculations. 1/ Adjusted for taxes. *Up to March 14, 217. Figure 29 Local Debt Coverage Ratios (in times (X)) 6 Overall T-Bills Coverage Ratio Overall T-Bonds Coverage Ratio appreciation during January and February 217 is expected to be tightening monetary conditions. Tightening conditions have been reflected in money markets, with the daily average spread between the overnight interbank and the mid-corridor policy rate gradually increasing since November 216, turning positive in February 217 and approaching the corridor ceiling at 15.75% during March. This was accompanied by an upturn in money markets activity, with the average daily volume of overnight interbank trading almost doubling to EGP 3.8 billion during February and the first two weeks of March 217, compared to EGP 2.1 billion between March 214 and January 217. Tighter liquidity conditions were driven by the recent increase in term-absorption of excess liquidity, that occurred despite higher excess liquidity in absolute terms which witnessed a decline only in the maintenance period ending March 13. The liquidity absorbed greater than 7 days averaged 81% of total excess liquidity during the first 15 days of March 217, compared to 72% and 69% in February 217 and January 217, respectively. The overnight lending facility was tapped during the period, however, by relatively weak magnitudes. As of February 217, lending rates came somewhat short vis-à-vis the CBE's policy rate hike by 3 bps. Commercial bank lending rates rose by 257 bps led by higher retail lending rates, while tax-adjusted rates of government securities rose by 213 bps, before inching up another 55 bps during the first two weeks of March, chiefly driven by higher overall T-bill yields during the period. Hence, as of February 217, the riskiness of private sector borrowing rose vis-à-vis government securities. Deposits rates, on the other hand, rose by 398 bps, reflecting the introduction of the 2% 1.5-year saving certificates. Source: Central Bank of Egypt calculations. *Up to March 14, 217. The somewhat weaker transmission of the CBE's hike to the local debt market was mainly due to three factors. First, higher demand for government securities reflected by the increase of coverage ratio to 2.3x between Monetary Policy Report, March 217 Central Bank of Egypt 12

14 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17* 3-Nov Nov Nov-16 6-Dec Dec Dec-16 8-Jan Jan-17 3-Jan-17 1-Feb Feb-17 4-Mar Mar Jan-17 1-Feb-17 7-Feb Feb Feb Feb-17 3-Mar-17 9-Mar Mar-17 Figure 3 Evolution of Egypt International Bonds to UST: Mid-yield to Maturity 1/ (in bps) year spread 1-year spread 5-year spread November 216 and mid-march 217 from 1.8x between June 216 and October 216, supported by net foreign portfolio inflows amounting USD 2.6 billion. Second, low issuance levels, especially of T-bonds, countering the impact of a slightly higher accepted-to-required ratio. Third, increasing net external financing of the fiscal deficit, which contained the need for bank and non-bank financing. Net external financing rose on the back of the successful issuance of USD 4. billion Egyptian Eurobonds in addition to the disbursement IMF s 1 st tranche equivalent to USD 2.7 billion. Source: Bloomberg. 1/UST yields at constant maturity. Figure 31 Egypt s 5 Year Credit Default Swap (CDS) Spread (in levels, %) Source: Bloomberg. Figure 32 T-Bonds minus T-Bills 1/ (in bps, weighted average yield) Source: Central Bank of Egypt calculations. 1/ Adjusted for taxes. *Up to March 14, 217. Table 1: Government Securities (aop) Yields (%) 1/ Auction details Oct-15 Mar-16 Oct-16 Dec-16 Jan-17 Feb-17 Mar-17* Overall T-Bills months months Overall T-Bonds Coverage Ratio (x) Auction details Oct-15 Mar-16 Oct-16 Dec-16 Jan-17 Feb-17 Mar-17* Overall T-Bills months months Overall T-Bonds Accepted./. Required (x) Auction details Oct-15 Mar-16 Oct-16 Dec-16 Jan-17 Feb-17 Mar-17* Overall T-Bills months months Overall T-Bonds Source: Central Bank of Egypt calculations. 1/ Yields are not adjusted for tax. */ March 14, 217 It is worth noting that Egypt's sovereign credit risk premium dropped post November's economic reform measures, as reflected by the drop in Eurobonds yields in the secondary market shortly after their issuance and the substantial improvement witnessed in Egypt s credit default swap spreads. Meanwhile, the spread between Egyptian T-Bonds and T- Bills using primary market data, remained negative on a tax adjusted basis during the first two weeks in March 217, continuing to show an inverted yield curve that has prevailed since December 216. While the inverted yield curve is affected by the substantial drop in issuance levels of long-term debt, it is in line with the assumption that inflationary pressures are of short-term nature. Monetary Policy Report, March 217 Central Bank of Egypt 13

15 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17* 1-Nov-16 8-Nov Nov Nov Nov-16 6-Dec Dec-16 2-Dec Dec-16 3-Jan-17 1-Jan Jan Jan Jan-17 7-Feb Feb Feb Feb-17 7-Mar Mar-17 Figure 33 EGX 3 Index (Index, November 1, 216 = 1) Source: Egyptian Stock Exchange and Central bank of Egypt calculations. Figure 34 Foreign Exchange Market Characteristics (in USD millions, unless otherwise stated) Monthly Average Volumes (RHS) EGP/USD Bid-Ask Spread (in bps, LHS) Furthermore, the efficiency of the foreign exchange market improved as reflected by the return of interbank market activity and the gradual narrowing of EGP/USD bid-ask spreads, which recorded 75 bps on average during the first 15 days of March 217, after peaking in November 216 at 29 bps. Equity prices as measured by the EGX3 index showed a strong performance post the economic reform measures in November 216, registering a cumulative average monthly increase by 46% as of mid-march 217, and an all-time high during January at the 13,436 level, supported by foreign investments amounting to USD 69 million during the period. Recently, the stock market performance has been somewhat impacted by news regarding the introduction of stamp taxes. Table 2: Foreign Portfolio Inflows (net, USD million) 1/ Period Stock Market T-bills T-bonds Total Nov-16 * Dec Jan Feb ,18.1-1,227.9 Mar-17 ** Total , ,334.3 Source: Central Bank of Egypt calculations. 1/ Based on trading dates. * Since November 3, 216. ** Until March 15, 217. Source: Egyptian Stock Exchange and Central Bank of Egypt calculations. Table 3: Fiscal Deficit Developments in H1 216/17 (in EGP billion) H1 215/16 H1 216/17 GDP * Overall deficit Primary deficit Total revenues Tax revenues Total expenditure Interest payment Source: Ministry of Finance. * Implied. f) The recent tightening of fiscal policy. Fiscal consolidation regained momentum in 216/17 with the primary as well as the overall fiscal deficit narrowing during the first 8 months of 216/17 to 1.4% and 6.7% of GDP, compared to 2.7% and 8.2% of GDP a year earlier, respectively, according to announcements by the MoF. While the fiscal consolidation resulted in transitory costpush pressures on inflation, which is likely to adversely impact growth over the short-term, it is expected to improve debt sustainability thereby availing room for countercyclical polices to resume its macroeconomic stabilization objective. During the first half of 216/17, the consolidation was largely driven by the expenditure side recording 12.% of Monetary Policy Report, March 217 Central Bank of Egypt 14

16 212/13 213/14 214/15 215/16 Figure 35 Fiscal Sector Developments (in % of GDP) Expenditures (LHS) Revenues (LHS) Overall Deficit (RHS) GDP compared to 13.1% of GDP a year earlier. In the meantime, total revenues dropped to record 6.8% of GDP in the same period compared to 7.1% a year earlier. Such deterioration in revenues was largely driven by tax revenues, which recorded 4.8% of GDP compared 5.1% in the H1 215/16. Nonetheless, the government s introduction of the value added tax system in September 216 at a rate higher vis-à-vis the sales tax, higher custom tariffs in November 216 as well as higher custom USD exchange rate compared to pre-november 216 will likely support tax revenue metrics going forward. Source: Ministry of Finance. Table 4: CBE Overdraft Financing (in EGP billion) 213/14 214/15 215/16 216/17 O/D 1/ CBE O/D legal limit / Outstanding Stock eop. 216/17 stock was recorded as of March In the meantime, the structure of the deficit financing shifted towards less bank financing (excluding revaluation effects) and more net external financing. This was supported by the agreement between the CBE and the MoF to gradually phase out monetary financing of the fiscal deficit as well as the improvement in Egypt s sovereign credit risk premium, particularly post the economic reform measures and the IMF-EFF agreement. Leading indicators show increased appetite for Egypt's T- Bills from foreign portfolio investors, supporting nonbank financing. In addition, external financing has further increased by the issuance of the USD 4. billion Eurobonds in late January 217 as well as by the disbursement of the 2 nd tranche of the World Bank development finance loan in March 217 (USD 1. billion). g) Monetary cross-check to the economic analysis 5. Broad money (M2) growth averaged 39.7% between November 216 and January 217, which narrows to 16.3% after excluding the exchange rate revaluation effect of its foreign currency components. Excluding revaluation effects, this compares to an average M2 growth by 14.% between July and October 216 and 14.8% during 215/16. 5 To exclude exchange rate revaluation effects, all foreign currency components in broad money were adjusted by using the January 217 exchange rate. Monetary Policy Report, March 217 Central Bank of Egypt 15

17 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Figure 36 Contribution to M2 Growth* (in pp) Net Other Items Claims on PSC CBE NCPEA CBE NCG CBE NFA * All foreign currency components at January 217 exchange rate. Figure 37 Total Loans to the Private Sector * (in %, y/y) 4% 3% 2% 1% % -1% -2% Claims on Private Sector Banks NCPEA Banks NCG Banks NFA Broad money (RHS) * All foreign currency components at January 217 exchange rate. Figure 38 Developments in Foreign currency deposits (in %) 7% 6% 5% 4% 3% 2% 1% % L/C claims on private sector F/C claims on private sector F/C deposits ratio to total deposits in M2 (%, LHS) F/C deposits (y/y %*, RHS) % 2% 15% 1% 5% % -5% -1% -15% The recent increase in M2 growth was largely driven by a substantial decline in the negative contribution of net foreign assets of the CBE and commercial banks, supported by the liberalization of the foreign exchange market under the new foreign exchange regime that preserved the CBE's foreign assets, improved balance of payment fundamentals as well as facilitated net external financing of the fiscal deficit. In the meantime, higher net external financing of the fiscal deficit as well as the agreement between the CBE and the MoF to gradually phase out monetary financing of the fiscal deficit, as discussed above, led the contribution of the banking system's net claims on the government to decline. On the other hand, the average contribution of claims on the private sector rose between November 216 and January 217, compared to the period between July and October 216, more than offsetting the drop in the contribution of net claims on the government, yet it is still lower than the average contribution of claims on the private sector during 215/16. However, this masks an increasing contribution of local currency claims on the private sector, with January 217 recording the highest since August 2. On the other hand, foreign currency claims on the private sector sustained its negative contribution to annual broad money growth which began since March 216. Regarding the components of broad money, currency in circulation outside the banking system as percent of local currency deposits in broad money resumed its downward trend between November 216 and January 217, following an interruption between March and October 216, registering 23.3% in January 217. This is by 1.9 pp higher than the average of 21.4% recorded over the ten years prior to the January 211 revolution, yet by 7.2 pp lower than the peak recorded in August 213. * All foreign currency components at January 217 exchange rate. The drop of the ratio was supported by the substantial increase in local currency deposits following the Monetary Policy Report, March 217 Central Bank of Egypt 16

18 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Figure 39 Developments of CIC Outside the Banking System (in %) 35% 3% 25% 2% 15% 1% CIC to M2 CIC to L/C deposits in M2 introduction of the 2% and the 16% 1.5-year and 3-year saving certificates in early November 216, respectively. It is worth mentioning that the introduction of these certificates led to a shift within the structure of the private sector local currency deposits to be dominated by deposits less than three years in January 217, after being dominated by deposits more than three years up to October 216. The share of deposits less than three years rose by 11.2 pp to 48.6% and the share of deposits more than three years dropped by 9.8 pp to 33.2%, while the share of other deposits remained roughly unchanged. Figure 4 Developments of the Inverse Money Multiplier and adjusted M 1/ (in %, unless otherwise stated) Adjusted M to M2D (LHS) Adjusted M (% y/y, RHS) 6% 4% 2% % -2% -4% 1/ Reserve money adjusted by standing facilities and fixed rate deposit auctions. Historically, the composition of deposits has been increasingly leaning towards local currency with few exceptions during periods of dollarization. More recently dollarization occurred between January and March 211, before resuming the downward trend to date. The slope of the downward trend sharpened since the rationing of foreign currency provision to banks by the CBE under the managed foreign exchange regime and the introduction of foreign exchange controls in January 213, which led to the emergence of parallel foreign exchange markets. This led the annual growth of foreign currency deposits (at constant exchange rate of January 217) to dive to negative territory, bottoming at negative 4.7% in January 214. More recently, annual growth of foreign currency deposits averaged 2.% between November 216 and January 217, compared to 5.3% between July and October 216, impacted by the CBE's policy rate hike and the introduction of 16% and 2% 3-year and 1.5-year saving certificates, respectively. In the meantime, the annual growth of reserve money (M) adjusted by standing facilities and fixed rate deposit auctions averaged 6.4% between November 216 and January 217, recording a substantial drop compared to an average of 23.% between July and October 216 and 24.9% during 215/16. The tightening was driven by the introduction of variable rate deposit auctions with maturities greater than 7 days that absorbed 61.9% of excess liquidity on average during the three months. Consequently, the money multiplier measured as the ratio between local currency components in M2 and Monetary Policy Report, March 217 Central Bank of Egypt 17

19 reserve money as defined above shifted upward since November 216. In addition to the longer-term absorption of excess liquidity, the above developments such as the decline of the dollarization ratio as well as the ratio of currency in circulation as a percent of local currency deposits also supported a higher multiplier, while the shift in the structure of local currency deposits somewhat offset this impact. Monetary Policy Report, March 217 Central Bank of Egypt 18

20 2. The Outlook a) Economic Targets To address longstanding challenges facing the Egyptian economy, the authorities have developed a homegrown program, whose credibility was supported by IMF's board approval of an EFF arrangement. The main elements of the program are (i) tight monetary policy to bring down inflation to single digits over the medium-term, (ii) strong fiscal consolidation to lower the general government debt to sustainable levels and avail room for countercyclical polices, (iii) structural reform measures to promote higher inclusive growth and employment, and (iv) strengthening the social safety net to offset the impact of reforms on the vulnerable. b) The Outlook Monetary conditions continue to be affected by previous policy rate increases and longerterm absorption of excess liquidity, as well as by the estimated appreciation of the REER over the short-term. This is underpinned by the anticipated moderation of monthly inflation rates which tighten real interest rates using forward looking inflation. The REER appreciation over the short-term is not expected to neutralize the substantial real depreciation that took place in November and December 216, which combined with low levels of inflation over the medium-term is likely to sustain the improvement in Egypt s competitiveness. While the costs associated with the correction of the misalignment of the REER in terms of transitory inflationary pressures are subsiding, the merits of the adjustment in terms of sustained improvement of balance of payment components and perseverance of gross international reserves are being gained. In addition to the expected improvement of net exports of goods and non-factor services, the exploration of new natural gas fields is expected to contain hydrocarbon imports, and the ensuing flexible exchange rate regime facilitates access to international capital markets and encourages foreign investment in Egypt. Such developments limit future cost-push inflationary pressures. In the meantime, demand-side inflationary pressures are limited by the likely weakening of real GDP growth over the short-term, before monetary policy unwinding combined with growth-supportive measures unleash the economy s growth potential in a more sustainable pattern. The recovery of net exports of goods and non-factor services as well as domestic and foreign investments including FDI are expected to complement consumption as growth engines by expenditure, while the recovery of tourism, non-petroleum manufacturing as well as extractions, particularly natural gas, are expected to support economic growth by sector. Underpinning this outlook are global assumptions. Global inflation is forecasted to remain broadly tame in 217, despite the increase in inflation outlook for advanced economies at a time when inflation in emerging economies is estimated to be lower. A slight recovery in Monetary Policy Report, March 217 Central Bank of Egypt 19

21 economic output is forecasted for advanced as well as emerging economies with divergent performance. This sets the stage in the global environment for monetary policy normalization, however at different speeds and forms. Against this background, given limited pressures from domestic and external variables on domestic prices looking ahead, the baseline forecast projects monthly inflation to normalize, while annual inflation is expected to remain elevated given the recent level shift of the CPI index, before favorable base effects kick-in and reduce the annual rate. 3. Monetary Policy Stance In its meeting held on March 3, 217, the MPC decided to keep the overnight deposit rate, overnight lending rate, and the rate of the CBE s main operation unchanged at percent, percent, and percent, respectively. The discount rate was also kept unchanged at percent. Consistent with the inflation outlook and the targeted disinflation path, the MPC judged that the key CBE rates are appropriate. It reiterated its price stability mandate and that it will continue to closely monitor all economic and monetary developments as well as the balance of risks, and will not hesitate to adjust the key CBE rates if needed to ensure price stability over the medium-term. Monetary Policy Report, March 217 Central Bank of Egypt 2

22 Appendix: Tables and Abbreviations Monetary Policy Report, March 217 Central Bank of Egypt 21

23 Tables Table A1: CPI Contribution Weights Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Monthly Contributions to Headline CPI Inflation (in pp) Headline Regulated Items Fresh Fruits & Vegetables Core CPI Food Prices of which Poultry & Red Meat Food excl. Poultry & Red Meat Retail Prices Services Annual Contributions to Headline CPI Inflation (in pp) Headline Regulated Items Fresh Fruits & Vegetables Core CPI Food Prices of which Poultry & Red Meat Food excl. Poultry & Red Meat Retail Prices Services Source: Central Agency for Public Mobilization and Statistics and Central Bank of Egypt calculations. Monetary Policy Report, March 217 Central Bank of Egypt 22

24 Table A2: Egypt's Balance of Payments (USD billion) Date Fiscal Years 215/216*(1) 216/217* 211/ / / / /216* (1) Q1 Q2 Q1 Q2 Trade Balance Export proceeds ** Petroleum exports Other exports Import payments** Petroleum imports Other imports Services Balance Receipts Transportation Of which: Suez Canal dues Travel ( tourism revenues ) Payments Travel Investment Income Balance Receipts Payments Of which: Interest paid Current Transfers Private (net), Official (net) Balance of Current Account Capital & Financial Account Capital Account Financial Account Direct investment abroad Direct investment in Egypt (net) Portfolio investment abroad Portfolio investment in Egypt (Net) # Of which: Bonds Other Investments (Net) Net Borrowing Medium- and Long-Term Loans (net) Medium- and Long-Term Suppliers' Credit Short term Suppliers Credit (net) Other Assets Other Liabilities Net Errors & Omissions Overall Balance Change in CBE Reserve Assets (Increase -) * Provisional. ** Including exports and imports of free zones. # Including net transactions on Egyptian TBs, as well as Egyptian government bonds issued for the Saudi Fund for Development in the amount of US$ 5 million in FY 211/212, Q4. It also includes foreigners' net transactions on medium- term dollar bonds issued by the Egyptian government in the amount of US$ 2.5 billion in the fourth quarter of 212/213, and of US$ 1. billion in the first quarter of 213/214, in addition to dollar bonds issued in the amount of US$ 135. million in the fourth quarter of 214/215. (1) The data were adjusted according to the latest update. Monetary Policy Report, March 217 Central Bank of Egypt 23

25 Table A3: Real GDP contribution at market prices (in pp) 21/11 211/12 212/13 213/14 214/15 215/16 Jun-15 Mar-16 Jun-16 GDP (at Market Prices) Domestic Absorption Consumption, of which: Private consumption Public consumption Gross domestic investments Net exports Exports of goods and services Imports of goods and services Net Indirect Taxes Source: Ministry of Planning. Table A4: Real GDP contribution at factor costs (in pp) 21/11 211/12 212/13 213/14 214/15 215/16 Jun-15 Mar-16 Jun-16 GDP (at Factor cost) Public GDP Private GDP Agriculture, forestry, fishing and hunting Industry Extractions Oil Natural gas Other Manufacturing Petroleum Non-Petroleum Services Construction Real Estate Rental and Services Transportation and Warehousing Finance Insurance 1/ Communication Tourism Educational, Health Care, and Other Services Utilities 2/ Information Trade Suez Canal General Government Source: Ministry of Planning. 1/ Includes Social Insurance. 2/ Includes Electricity, Water, and Sewage. Monetary Policy Report, March 217 Central Bank of Egypt 24

26 Table A5: Market Developments (aop) Oct- 15 Mar- 16 Oct- 16 Dec- 16 Jan- 17 Feb- 17 Mar- 17* Latest Vs. Oct. 216, in bps 1/ Policy Rate Mid-Corridor Rate, % Money Market Interbank WAR,% Interbank O/N rate, % Interbank O/N average volume, EGP million 1,524 1,347 1,799 2,468 2,986 3,877 3,77 1,98 Interbank O/N share of total interbank volume, % ,848 Banking Sector 2/ Deposit Rates, % n/a 398 Time, % n/a 287 Saving, % n/a year, % n/a years, % n/a 322 Saving Accounts, % n/a 245 Lending Rates, % n/a 257 Short term business, % n/a 198 Long term business, % n/a 189 Retail, % n/a 331 Local Debt Market T-Bill yield 1Y, % Overall T-bill yield, % Overall T-bond yield, % WACF, % 3/ Spreads 3/ O/N interbank - mid corridor policy rate, % Overall Lending Rate - Mid Corridor, % n/a -43 Mid Corridor - Overall Deposit Rate, % n/a -98 WACF - Mid Corridor, % Overall Yield Curve, % T-bill yield 1Y - deposit rate, % n/a -197 Overall lending rate - WACF, % n/a 44 Overall lending rate - T-bill yield, % n/a 25 Overall lending rate - Deposit rate, % n/a -14 Short term Business lending - T-bill yield, % n/a -34 Long term Business lending - T-bill yield, % n/a -43 Long term Business - Short term Business lending, % n/a -14 */ Up to March 15, / All changes are in basis points with the exception of Interbank o/n volume, the changes are in EGP million. 2/ Data are subject to revision. 3/ Government securities' yields are adjusted for tax. Monetary Policy Report, March 217 Central Bank of Egypt 25

27 Table A6: Monetary Survey and Central Bank Accounts (eop, in EGP billion) 211/12 212/13 213/14 214/15 215/16 216/17-7M Monetary Survey Net foreign assets Central bank Commercial banks Net domestic assets Net claims on central and local government Net claims on public economic authorities Claims on public sector companies Claims on private sector Net other items Broad money (M2) ,71.6 Domestic currency component (M2D) ,4.9 Currency outside banks Domestic currency deposits ,626.1 Foreign currency deposits Central Bank Accounts Net foreign assets Foreign assets Foreign liabilities Net domestic assets Net claims on central and local government Net Claims on Public Economic Authorities Claims on Banks Banks' deposits in foreign currency Open market operations Other items net Reserve money 1/ Currency in circulation Reserves of banks Cash at vaults Deposits in local currency / Reserve money as of end 214/15 was affected by cancellation of deposit renewals at CBE due to unexpected announcement of national holiday on June 3, 215 Monetary Policy Report, March 217 Central Bank of Egypt 26

28 Abbreviations aop Average of period BoP Balance of payments bps Basis points CAPMAS Central Agency for Public Mobilization and Statistics CBE Central Bank of Egypt CIC Currency in circulation CPI Consumer price index EGP/USD Egyptian pound per US dollars EGX3 The Egyptian exchange bench mark index eop End of period FDI Foreign direct investment FPIs Foreign portfolio inflows FX MARKET Foreign exchange market GCC Gulf Cooperation Council GDP Gross domestic product GIR Gross international reserves IMF International Monetary Fund IMF EFF International Monetary Fund Extended Fund Facility L/C Local currency L/F Foreign currency LHS Left hand side m/m Month on month M Reserve money M2 Broad money M2D Local currency component of broad money MoF Ministry of Finance MPC Monetary Policy Committee NDA Net domestic assets NCG Net claims on government NCPEA Net claims on public economic authorities NEGS Net exports of goods and non-factor services NDA Net domestic assets NEER Nominal effective exchange rate NFA Net foreign assets O/D Overdraft facility of the Central Bank of Egypt to the government O/N Overnight OPEC Organization of Petroleum Exporting Countries PBS Private business sector pp Percentage points PSC Public sector companies REER Real effective exchange rate Monetary Policy Report, March 217 Central Bank of Egypt 27

29 RHS Right hand side SOEs State-owned enterprises UK United Kingdom US United States USD US dollars UST - US treasuries WACF - Weighted average cost of finance y/y Year on year Monetary Policy Report, March 217 Central Bank of Egypt 28

30 Monetary Policy Report, March 217 Central Bank of Egypt 29