Introduction

Many think that monetary policy is of concern only to the wealthy or perhaps modest savers with deposits or investment certificates who are perpetually looking for an alternative to protect their savings. These are the only people who have benefited from successive interest rate hikes, even if the aim is to distract them from the dollarization of deposits or the scramble to withdraw funds from banks.

In fact, monetary policy affects people without savings, which should perhaps spur them to turn on the television or scroll through social media when the Central Bank meets in order to better understand decisions about the interest rate. By dint of the Central Bank’s open market operations and its control of the money supply and interest rates, as well as the interrelationship of monetary and fiscal policy, monetary policy plays an important role in further impoverishing the poor.

Literature Review

The literature on the impact of monetary policy on poverty is very limited. An analysis of data from several countries has found a direct correlation between expansionary monetary policy and income inequality (Crowe, 2006), while other research (Albensi, 2007) has shown that the poorest groups are more severely affected by the inflationary consequences of expansionary monetary policy. Doepeke and Shnidier (2006) demonstrate that successive interest rate hikes in several countries have benefited the wealthy and exacerbated poverty for the poor due to job losses and the inability to withstand the repercussions for borrowing.

In this article, I consider the Egyptian case, asking whether the poor have been able to avoid the various channels by which monetary policy impacts them.

Interest Rates and Inflation

The Central Bank seeks to target inflation—this oft-repeated assertion proved to be entirely false in 2023. The Central Bank of Egypt (CBE) has announced its inflation targets multiple times (currently 7% +/- two points), but remains as far as ever from achieving them, as shown in the following table. These figures cannot conceivably be interpreted as designed to target inflation. Rather, the main goal seems to be achieving an equilibrium between the USD/EGP exchange rate and the growing supply of the local currency.

Date	CBE decrees on the interest rate
February 2, 2023	Fixed the deposit rate at 16.25% and the lending rate at 17.25%
March 30, 2023	Raised the rate by 2 points, bringing the deposit rate to 18.25% and the lending rate to 19.25%
May 18, 2023	Held the deposit rate at 18.25% and the lending rate at 19.25%
June 22, 2023	Held the deposit rate at 18.25% and the lending rate at 19.25%
August 3, 2023	Raised the rate by 1 point, bringing the deposit rate to 19.25% and the lending rate to 20.25%
September 21, 2023	Held the deposit rate at 19.25% and the lending rate at 20.25%
November 2, 2023	Held the deposit rate at 19.25% and the lending rate at 20.25%
December 21, 2023	Held the deposit rate at 19.25% and the lending rate at 20.25%

The printing of more money has fueled inflation. As the two figures below show, the relationship between them is entirely linear: the greater the money supply, the higher the core inflation rate. Core inflation refers to commodity prices—largely food prices—which have a heavier impact on the poor. The poor benefit only slightly from public spending given the decline in non-cash subsidies, which jumped from a growth rate of 15.7% in June 2022 to 33.5% in June 2023.

Source: CBE, Monthly Bulletin, September 2023; Ministry of Finance, Monthly Economic Bulletin, November 2023

Source: CBE, Monthly Bulletin, September 2023; Ministry of Finance, Monthly Economic Bulletin, November 2023

In any case, subsidies and assistance accounted for no more than 17.7% of total public expenditure in the 2023/24 budget. According to the financial statement for the 2023/24 budget, “The state intends to continue to shift to cash and semi-cash subsidies.” Meanwhile, interest payments account for 37.5% of the total public expenditure, and, according to the same financial statement, “This year will witness a historic rise in interest payments due to the CBE’s tightening monetary policy, as the prices of food commodities continue to rise.”

In other words, the state’s story is that an increase in food prices led to higher inflation, which led to higher interest rates, which led to higher interest payments and thus increasing pressure on funds allocated to subsidies and investment in the state budget. And—surprise—this means more poverty.

The data tell another story. The poor have been crushed underfoot by a combination of factors: higher food prices, higher core inflation, the printing of money to feed the budget deficit, the CBE’s incoherent (non)monetary policy (though it looks more coherent when seen as a weapon in the war with the dollar), increasing open market operations (more than EGP1 trillion in September 2023), and subsidy cuts undertaken in a bid to reduce spending.

An open market operation is an action by a central bank to increase or reduce other banks’ liquidity in the local currency. To do this, the central bank can buy or sell government bonds on the open market (hence the name) or, more typically these days, enter into a guaranteed repurchase or secured lending agreement with a commercial bank, which involves the central bank making a cash deposit for a specified period and taking assets as collateral. Open market operations are a chief means of implementing monetary policy.

In addition to giving or taking liquidity to or from commercial banks, open market operations are used to manipulate the short-term interest rate and inject money into the economy, thus indirectly allowing the central bank to control the total money supply. This involves meeting the demand for money at the target interest rate by buying and selling government securities or other financial instruments. The implementation of open market operations is guided by monetary targets such as inflation, interest rates, or exchange rates.

The Lending Rate and Employment

The literature discusses another channel by which monetary policy influences poverty: employment and lending. Credit extended to the government accounted for 68.5% of overall credit in August 2023, up from 63% in 2020. This means that the government is the main controller of the banking sector. In turn, government borrowing is responsible for exacerbating unemployment because it is crowding out borrowing by the private sector, which could be used to employ workers. Hence, via the interest rate, tools necessary for employment, and the exchange rate—a problem facing all importers of raw materials and tools necessary for operation—monetary policy has adversely affected the poorest Egyptians.

Accordingly, monetary policy has never been a policy for steering the economy to overcome crises, but in fact may itself be part of the crisis, whose impact is felt more keenly by the poorest.

In general, and especially since they regulate the banking sector and its role in the economy, central banks are bound (or bind themselves) by rules that allow for no public participation. In this context, it is difficult to imagine participatory decision making. But the explosion of public debt in Egypt absent any accountability for those responsible has led to a grinding economic crisis. The poorest Egyptians have seen no clear return on this debt in the form of increased production and employment.

All of this compels us to imagine alternative solutions that must entail a more adept integration between fiscal policy and monetary policy, one that is more attentive to the needs of the poor. Such a solution should focus on public spending on programs to make real production—in agriculture and industry—more efficient, casting aside tenuous incentive systems that give rise to various types of opportunists and speculators rather than producers. It must involve genuine integrated programs for import substitution that may require taking advantage of public business sector companies that produce production inputs. Finally, it must make room for a monetary policy that truly targets inflation. Perhaps then, even if the state moves to a flexible exchange rate, it will not be as painful as the impending devaluation is expected to be.

References and Further Reading

Albanesi, S. (2007). Inflation and inequality. Journal of Monetary Economics, 54(4), 1088–1114.

Atkinson, A. B., Piketty, T., & Saez, E. (2011). Top incomes in the long run of history. Journal of Economic Literature, 49(1), 3–71.

Balac, Z., (2008). Monetary inflation’s effect on wealth inequality: An Austrian analysis. Quarterly Journal of Austrian Economics, 11, 1–17.

Boivin, J., & Giannoni, M. P. (2006). Has monetary policy become more effective? Review of Economics and Statistics, 88(3), 445–462.

Brunnermeier, M. K., & Sannikov, Y. (2012, August 31–September 1). Redistributive monetary policy [Paper presentation]. Jackson Hole Symposium, Kansas City, MO., United States.

Bulir, A. (2001). Income inequality: Does inflation matter? IMF Staff Papers, 48(1).

Carpenter, S. B., & Rodgers III, W. M. (2004). The disparate labor market impacts of monetary policy. Journal of Policy Analysis and Management, 23(4), 813–830.

Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1999). Monetary policy shocks: What have we learned and to what end? In J. B. Taylor & M. Woodford (Eds.), Handbook of Macroeconomics (1st ed., vol. 1, pp. 65–148). Elsevier.

Clarida, R., Gali, J., & Gertler, M. (1999). The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature, 37(4), 1661–1707.

Clarida, R., Galí, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics, 115(1), 147–180.

Coibion, O., Gorodnichenko, Y., Kueng, L., & Silvia, J. (2012). Innocent bystanders? Monetary policy and inequality in the U.S (Working paper 18170). National Bureau of Economic Research.

Doepke, M., & Schneider, M. (2006). Inflation and the redistribution of nominal wealth. Journal of Political Economy, 114(6), 1069–1097.

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