Egypt's central bank to start 28-day repos in July

Egypt's central bank will introduce 28-day repurchase agreements (repos) on July 10, a move one banker said was designed to add liquidity to a market drained of funds because of soaring interest rates on treasury bills.

The Central Bank of Egypt (CBE) had already introduced seven-day repos in March 2011 to manage short-term interest rates after the political and economic unrest that ousted President Hosni Mubarak. It offers the repos to banks once a week at an interest rate of 9.75 per cent.

"As part of its monetary policy framework, the CBE has decided to introduce a 28-day repurchasing agreement (repo) starting July 10, 2012," the central bank's Monetary Policy Committee said in a statement after a meeting on Thursday.

It said the 28-day repos would be variable rate tenders with a minimum bid equal to its seven-day repo rate.

"They're trying to ease the market, because in recent weeks liquidity has been tightening," said the banker, who works in the treasury of a Cairo-based bank.

The tighter liquidity was due to higher interest rates that have prompted banks to invest increasing amounts of money in treasury bills, he said.

Yields on short-term T-bills have hit record highs in the last month as Egypt's government turns increasingly to domestic banks to finance a budget deficit that has widened in the wake of last year's uprising that toppled Mubarak.

The average yield on 182-day treasury bills rose to 15.359 percent at an auction on Thursday, their highest in at least a decade. After tax, this translates into an effective yield of around 12 percent.

The high yields have spilled over into the interbank market, pushing overnight rates to between 10.0 and 10.1 percent in recent weeks.

This comes close to the 10.25 percent rate charged by the central bank for overnight borrowing and exceeds the 9.75 per cent banks can get through the central bank's repo system.

Banks have been using funds obtained at 9.75 per cent under the weekly repo offerings to buy T-bills.

"They get these maturities and renew them, doing rollovers and buying more and more. And they have the funding source, which is the repo," the banker said.

"You can monitor this in recent weeks," he said. "The amounts of the repos injected by the central bank have been increasing, increasing, increasing. They started with like 10 billion (Egyptian pounds, or $1.65 billion), then 12, 15, 20, 25. On Tuesday, two days ago, they auctioned 38 billion."

He said the new 28-day repos would alleviate the pressure only in the short term.

"I think it's going to recur, because people are greedy. They will get the money and reinvest in T-bills and bonds," he said.