The gain and pain of raising interest rates
By the end of last month, the Monetary Policy Committee had reduced benchmark interest rates on central bank transactions by a cumulative 5.25 percentage points since the beginning of the year, a substantial cut, signaling a potential turning point away from the high-interest strategy launched two years ago. This pivot coincides not coincidentally with the nearing end of the IMF loan program, initiated in 2022.
The IMF’s prescription of higher interest rates may indeed have helped curb inflation, which peaked above 40% in October 2023 and has since retreated to below 20%. Yet another side to the policy is the economic costs of elevated financing, particularly the strain on the industrial sector, which has historically been the most capable of creating jobs and driving growth.
Quantifying the industrial losses from tighter monetary policy as the IMF program runs its course until 2026 may well force a reconsideration of the Fund’s monetary orthodoxy.
How was Egyptian industry affected?
Investment in industry is vital to the broader economy. A loan that enables a manufacturer to build a new production line eventually yields outsized returns, generating durable jobs and catalyzing related industries.
Although Egypt lacks long-term, precise measures of industrial investment, the World Bank’s private sector gross capital formation index serves as a proxy. This metric captures the existing stock of factories, machinery, equipment, and construction—essentially, the productive capital base that will generate value for years ahead.
In the figure below, this index (measured as a share of GDP) shows two sharp declines coinciding with periods of elevated interest rates, underscoring how higher borrowing costs can suppress capital investment.
Some argue that companies were insulated because real interest rates—nominal rates adjusted for inflation—were low or negative over recent years. But this overlooks the broader business environment: high nominal rates shape expectations, prompting firms to shelve expansion plans. Egyptian business leaders themselves have testified to this hesitation.
https://public.flourish.studio/visualisation/25248700/Strikingly, both downturns in capital formation coincided with IMF interventions—structural reforms in the 1990s and the 2022 loan agreement.
Dwindling investment in industry matters because the sector not only contributes disproportionately to GDP growth but also employs about 3.5 million workers. While no Egyptian study has accurately determined the reasons for low capital formation or whether it correlates with interest rates, research in other developing economies warns of the dangers of financing costs crowding out growth.
Business voices have reinforced this. The CEO of Edita Food Industries repeatedly lamented last year that high borrowing costs derailed investment plans. Nearly a decade ago, the head of the Federation of Egyptian Industries raised the same alarm when rates began to rise steeply. Billionaire Naguib Sawiris went further, asking how an investor could be expected to pay 30% interest when no business could promise equivalent returns.
Such persistent criticism compels a deeper look at why the IMF insists on raising rates—and why Egyptian authorities have so faithfully complied despite the steep domestic costs.
The rationale for higher rates
Technically, neither the IMF nor the central bank treats higher rates as an end in themselves. And formally, the central bank does not dictate lending rates across the system.
Yet, in practice, both institutions drove rates higher. The central bank adopted an inflation-targeting framework: it sets a desired range for price stability, then uses its policy rate—the return it offers in operations with commercial banks—to steer liquidity. When inflation runs hot, it raises rates to absorb money from the system. Its role as lender of last resort amplifies its influence across the banking sector.
In recent years, inflation was largely fueled by repeated, steep devaluations of the pound. The IMF pushed for a free float of the exchange rate, coupled with inflation targeting. That inevitably meant extended periods of punishingly high rates to offset the inflationary shock of devaluation.
https://public.flourish.studio/visualisation/25248822/The consequences were visible. As the chart above shows, industrial output growth became violently volatile, including the two deepest contractions since the Ministry of Planning began publishing data in 2003. The only prior contraction occurred in the aftermath of the global financial crisis, and it was milder.
Two variables stand out in explaining the contraction. First, the industrial sector’s share of bank credit declined from 14% in 2021 to 10.5% in Feb. 2025, suggesting firms were unable to secure working capital for raw materials or expansion.
Second, industrial concerns increasingly shifted their surpluses into high-yield government treasury bills. Instead of reinvesting in production, firms sought refuge in financial arbitrage—becoming debt investors rather than producers.
https://public.flourish.studio/visualisation/25248956/Defenders of the IMF might argue that devaluation was necessary to correct Egypt’s external imbalances. But in truth, the IMF’s liberal capital-flow doctrine helped create those imbalances. Every major devaluation was preceded by an exodus of speculative portfolio capital—precisely the flows the IMF insisted Egypt accommodate.
Researchers such as Osama Diab caution against overreliance on monetary policy to tame inflation, particularly in an economy like Egypt’s. As he put it: “When it comes to basic goods, especially food, higher interest rates cannot rein in prices. People will not stop eating and drinking just because fixed-income investments are suddenly attractive.”
Most critically, the central bank’s attempts to mitigate the financing burden were curtailed—by the IMF itself.
The rise and fall of subsidized lending
With complaints of finance costs mounting after the 2017 rate hikes, the central bank launched a subsidized lending initiative in 2019, offering loans to industrial projects at a declining rate of 10%, later cut to 8% amid the COVID-19 crisis.
This was an extension of earlier programs: in 2016 the central bank offered small businesses 5% loans, later broadening to agriculture, tourism, construction, and housing finance. In these schemes, the central bank covered the spread between subsidized and market rates.
But in 2022, under IMF pressure, the central bank canceled most such programs as a precondition for securing the new loan. Responsibility shifted to the Finance Ministry, which proved more restrictive. The new initiative, announced in March 2024 and only launched in December, carried a subsidized rate of 15%—still well above the earlier programs—and was plagued by bureaucratic delays. Banks have yet to disburse funds, citing onerous conditions, according to sources that spoke previously to Al Manassa.
The total allocation was modest, just 30 billion pounds (about $600 million), with loans capped at 75 million pounds ($1.5 million) per client. For targeted industries like infant formula, this cap was low. As Ibrahim Ezzat, head of a company in the sector, told Al Manassa: “How is this supposed to help when it doesn’t even cover the spare parts for a milk factory?”
The stinginess reflects the Finance Ministry’s own fiscal bind. To impress the IMF, it prioritized achieving a primary surplus—austerity optics—over channeling resources to industrial growth.
The IMF program will expire in 2026. But by then, it will have left Egypt with contradictions of its own making. That deadline offers a chance to rethink policy, put industry first, and reduce the likelihood of another future IMF rescue.