Egypt’s central bank is set to meet on 21 May to discuss the possibility of raising interest rates, following the IMF delegation visit to Cairo this week.

The meeting will come after the IMF’s first review of Egypt’s $12bn loan programme, which could see the international fund disperse the second tranche of the loan by the end of the month.

On 30 March, the central bank kept its key interest rates unchanged during a Monetary Policy Committee meeting. It kept its overnight deposit rate at 14.75 per cent and its overnight lending rate at 15.75 per cent, the fourth consecutive meeting where rates were unchanged since it aggressively hiked them in November.

Local banking sources have told MEED that the central bank may increase interest rates again following mounting pressure from the IMF to curb rising inflation rates, which reached highs of 32 per cent in March this year.

The idea is that high interest rates will allow for economic growth. But a number of analysts have told MEED that in the case of Egypt, higher interest rates do little to appease Egypt’s problem of “supply shocks rather than demand-driven inflation,” as finance minister, Amr al-Garhy, put in in an interview on local television earlier this month.

Higher interest rates can help in raising inflows into treasury bills and investment portfolios. They can also help compensating creditors for inflation.

The problem is inflation in Egypt has little to do with liquidity in people’s hands, it is caused by a surge in production costs following the currency devaluation, the lifting of key subsidies, the introduction of a value added tax and a hike in custom fees. Raising interest rates in this case does little to curb supply inflation, which is the case for Egypt.

In an attempt to avoid raising domestic interest rates, the cabinet recently raised the limit of the maximum amount of dollar bonds the country can issue on international markets by $2bn. The ceiling of international dollar issuances to fixed income investors is currently capped at $5bn and has been raised to $7bn, indicating Cairo could return to the international debt market again this year.

International debt markets and the IMF’s $12bn loan may have helped Cairo boost its foreign reserves and provide the required push for much-needed needed reforms. But the speed of the reforms coupled with the lack of effort to alleviate the effects of these changes could leave Egypt and IMF in a similar situation to Greece, where public debt continues to rise without any reform programmes showing any signs of fruition.

The IMF delegation could therefore find itself at odds with the Egyptian government this week. Policymakers in Cairo will be concerned with rising living costs and deteriorating living conditions that have followed its ambitious reform programme.