Mobius Criticizes One-Size-Fits-All IMF Rate Advice to EgyptBy and
Higher rates won’t necessarily lead to lower inflation
Egypt’s interest rate increase a ‘little bit premature’
The International Monetary Fund’s recipe to stabilize economies doesn’t work for Egypt, said Mark Mobius, the executive chairman of Templeton Emerging Market Group.
When the IMF goes into a country “they say ‘look, first of all, you’ve got to solve inflation, you’ve got to raise interest rates and increase taxes,” Mobius said on the sidelines of a conference in Dubai. “These go well and good when the environment is healthy. But in an environment like in Egypt now, it is not a healthy situation at this stage.”
Egypt’s central bank unexpectedly raised the benchmark interest rate by 2 percentage points to 16.75 percent Sunday night, saying the move was needed to curb “demand-side pressure” and rising consumer prices. Inflation accelerated above 30 percent this year after the nation removed currency controls in November to help finalize a $12 billion IMF loan, allowing the pound to weaken about 50 percent.
Sunday’s move came a month after the IMF said curbing inflation should be Egypt’s top priority. Fund officials said at the time interest rates are the right instruments to tame consumer prices, but they later listed them as merely an option. The Washington-based lender has been criticized for advocating a one-size-fits-all formula of lower public spending and higher interest rates, which some economists said was responsible for deepening crises, such as the Asia’s financial turmoil in 1997.
“Rates are so high now, how can a businessman survive?” Mobius said, adding that the rate increase was a “little bit premature.” “To some extent, it will give support to the pound, but do you want that? You probably want a weak pound to get exports going.”
The rate increase was the second since November, when it was raised 300 basis points. The decision sent the EGX 30 Index of stocks tumbling 2.5 percent, the most among gauges tracked by Bloomberg globally.
“Unfortunately, people believe that if you raise interest rates, you lower inflation and inflation expectation," Mobius said. “This is not necessarily the case.”