There have been several major developments in 2021 that have had varying impacts on economies the world over. The beginning of the year witnessed a decreased economic activity worldwide due to the repercussions of Covid-19 and the application of relevant precautionary measures. This affected a large number of economic sectors, bringing about a decline in production rates and an inflation surge.

However, with the wide vaccine rollout worldwide, the global economy started turning the corner and a positive outlook prevailed as regards the future of the global economy, dissipating the state of uncertainty that plagued the world. This optimistic outlook brought about a significant increase in demand rates, resulting in pressures on merchandise inventory. Further, the turbulent weather conditions resulted in a decline in the productivity of the global agricultural sector, coinciding with caution on the side of energy producers, which kept energy production at low rates compared to demand rates. All of these factors resulted in a drop in supply rates, leading to an increase in global prices, which had a bearing on local economies. In trying to stabilize the global economy and contain the supply and demand shocks towards stabilizing global inflation rates, a new variant of Covid-19, Omicron, emerged in late 2021, creating a state of uncertainty about the future of the global economy.

Managing Egypt’s Monetary Policy in 2021

The Central Bank of Egypt (CBE) aims at achieving stability of general price level and supporting the recovery of economic activity, provided that the inflationary pressures are contained.  The CBE targets an average inflation rate of 7 percent (±2 percent). To that end, the Monetary Policy Committee (MPC) convenes at the CBE to determine interest rates that will help achieve the monetary goals. In 2021, the MPC convened eight meetings and approved maintaining the overnight deposit and lending rates and the main refinancing operations rate at 8.25, 9.25, and 8.75 percent, respectively, besides maintaining the credit and discount rates at 8.75 percent. A review of effective inflation rates in 2021 reveals that they did not exceed the target rate announced by the CBE.

Annual Urban Inflation Rate

Figure 1: The annual urban inflation rate

As can be seen in figure 1 above, inflation rates have been on a downward trend since late 2020 until April 2021. Perhaps this can be attributed to the jump-start economic recovery, the gradual return of economic life to normal, the growth of economic output rates in several sectors, and the measures taken by the state to avoid a shortage of basic commodities in markets. Starting from May 2021, the inflation rate took an upward trend following the recovery of the global economy and the increase in global demand rates. As a result, supply rates trended higher and demand for production inputs and raw materials increased. The increased pressure on supply chains on the one hand, and demand chains on the other, has led to disruptions in global supply chains, giving rise to an increase in global prices of oil, foodstuff, and a number of primary commodities. These developments affected prices in Egypt, as has been evidenced by the increase in prices of food commodities. However, the decline in the inflation rate of non-food commodities partially prevented higher inflation.

Real GDP Growth Rate

Figure 2: Real GDP growth rate

As for the role of the monetary policy in supporting economic recovery, figure 2 makes clear the positive impact of the CBE decisions on economic growth rates in Egypt. In 2021, there has been a significant increase in the real GDP growth rate, rising to 9.8 percent in the third quarter of 2021, up from 2 percent in the last quarter of 2020. Domestic consumption played the largest role in boosting economic growth rates, against negative contribution rates of domestic investment and net exports. Trade, construction, communications, and natural gas extraction sectors were among the leading sectors that stimulated economic growth as opposed to tourism and non-petroleum manufacturing sectors, which experienced a decline in growth rates until mid-2021 before rising later. The rise in global prices spurred domestic production processes. Output rates affected unemployment rates, which stabilized at an average of 7.3 percent.

Unemployment Rate

Figure 3: Unemployment rate

Overall, the CBE role wasn’t limited to setting interest rates as it pursued numerous policies geared towards  mitigating repercussions of the pandemic on the economy, including, for instance, deferring all credit dues for all customers whether corporates, small and medium enterprises, or individuals to provide liquidity and support consumption, setting measures to limit cash transactions and facilitate electronic payments, launching Initiative for Electronic Payments, increasing the number of ATMs to 6500, and availing the necessary credit limits to finance importing strategic commodities.  Additionally, the CBE launched several initiatives to support different sectors, including the Initiative for Non-Performing Companies Operating in the Tourism Sector, the Industrial, Agricultural, and Construction Private Sector Initiative, the Mortgage Finance Initiative. The interest rate for these initiatives have been adjusted, reducing from 10 to 8 percent. Further, the CBE facilitated meetings for boards of directors by allowing the participation in banks’ board meetings via video or teleconference till the end of 2021, amended credit registry rules, exempted banks from calculating additional capital requirement for concentration risk of the top 50 borrowers, implemented the  IFRS9 reporting standard, enhanced the role of credit risk guarantee companies in initiatives to support sectors of tourism, industry, agriculture, and construction, and finally amended the financial inclusion regulations.

Future Trends of Macroeconomic Indicators in 2022

The CBE is expected to contain future inflation rates in 2022, although they may rise due to the global supply chain crisis, the expected rise in global prices, and the increase in Omicron cases. However, they will generally remain within the target rate of 7 percent (±2%) on average. In effect, the Egyptian government targets stabilizing inflation rates at 6 percent and maintaining the unemployment rate at 7.3 percent until the end of the 2021-2022 fiscal year. As for the GDP growth rate, forecasts of the International Monetary Fund of January 2022 expect it to record 5.6 percent in 2021-2022.

In short, the overall policies of the CBE had a significant impact on achieving domestic economic goals, including containing inflationary pressures, stabilizing unemployment rates, and raising GDP rates. Furthermore, the stability of interest rate, along with the containment of inflationary pressures helped maintain the real value of local savings, which contributed to the stabilization of the general economic conditions amid supply and demand shocks facing the global economy.