A fragile economy and a divided monetary power. What can the central bank achieve by raising the interest rate?!

A fragile economy and a divided monetary power. What can the central bank achieve by raising the interest rate?!

As part of the economic measures to save the riyal that continues to decay in front of foreign currencies, the central bank of Yemen decided to raise the interest rates on certificates of deposit and government bonds while the bank is still divided between two branches and the headquarters of commercial banks are still in the capital Sana'a, under Houthis control.

The central bank of Yemen announced Wednesday that it would raise the interest rate on certificates of deposit to 27%, raise the profit on the agency's deposits to 23%, and raise the interest rate for government bonds to 17%, as part of the procedures and decisions it takes to maintain the price of the national currency.

The center stressed that these receptacles should be treated with cash amounts supplied to the central bank in its main position in Aden or with the approval of the governor in a branch of the bank, and explained that the profits of the deposits will be paid every three months, or by the decision of the governor under the agreed periods, according to the official Yemeni news agency Saba in its government version.

While the central asserted that the interest rate hike comes within the framework of the treatments and decisions it takes to maintain the price of the national currency, the Yemeni riyal saw a new landing on Wednesday from 617 to 630 riyals against the dollar.

What is the interest rate?

The interest rate is the price that the central bank pays on commercial bank deposits, whether short or long-term, according to the World Bank, and raising interest means curbing borrowing and thus reducing the liquidity of the market, thus lowering the rate of inflation (price rises).

What does the central bank want?

Commercial and banking sources explained to the "Almasdar online " that the central bank raised interest rates to withdraw cash from the market to boost the exchange rate of the riyal against the dollar, and encourage banks to invest in government bonds.

The government was in financial straits and tried to borrow from commercial banks by issuing government bonds at the end of July, but failed to persuade commercial banks to invest in government bonds and to encourage banks to deposit funds in the central bank, the sources said, deciding to raise the price Interest on deposits.

Among the objectives of raising interest rates is to curb the rise in commodity prices, but in the case of Yemen, according to banking experts, the current inflation (rising prices) is due, inter alia, to the repercussions of the war and the increase of taxes, customs duties and royalties on the goods imposed by the groups. Armed from all sides at checkpoints along the roads.

Raising the interest rate is feasible if price rises are the result of increased demand and consumption, and work is done to reduce consumption by raising the interest rate to encourage people to deposit their money instead of consumption that causes higher prices.

Raise interest between Aden and Sanaa

The central bank remains stalled and divided between the legitimate government operating from the temporary capital of Aden (the south of the country) and the Houthi rebel group that controls the capital, Sana'a, and this division affects the bank's ability to manage monetary policy tasks from Aden, and imposes obstacles to the implementation of the decision to lift Interest rates.

On September 18, 2016, President Abed Rabbo Mansour Hadi decided to relocate the central bank's headquarters and Operations department to the interim capital of Aden, but the Houthis kept the central bank in Sana'a as their own parallel central bank, causing greater damage to the national economy and successive crises, including a crisis Salaries and depreciation of the Yemeni currency.

Yemeni economists believe that the central bank's split is one of the main causes of the country's economic crisis, and that the central bank in Aden is hampered by the use of monetary policy instruments, including raising the interest rate, and that the government's success in managing monetary policy It is contingent on the consolidation of the bank's work currently divided between the Sharia government in Aden (south of the country) and the al-Houthi group, which controls the capital, Sana'a.

According to the Yemeni Ministry of Planning, the absence of a unified and effective monetary authority has had serious repercussions on the banking system in all regions of the country, causing the citizen's confidence in the national currency and banking institutions to deteriorate, thus favoring the acquisition of foreign currencies and withdrawing them outside the banking system.

The ministry said in a report released in early July:  "This split has disrupted commercial banks with the instructions of two inconsistent and non-functional monetary authorities, resulting in the impossibility of using appropriate monetary policy instruments to mitigate the exchange rate crisis such as interest rate and legal reserve ratio."

Cart before horse

In the decision to raise the interest rate, the government puts the cart before the horse, and it had to start by preparing its decision by transferring the main headquarters of commercial banks from Sana'a to Aden, because about 80 percent of economic, commercial and banking activity is concentrated in Sana'a and the rest of the Houthis.

Economist Bilal Ahmed said raising interest rates was an impromptu and unthoughtful decision, as the former was to work to restore the trust of the commercial banking sector before deciding.

Ahmed told  "Al-Masdar online ":  " The main headquarters of commercial banks should first be relocated to the interim capital of Aden, where the government is based in the capital Sana'a, as the interest rate hike if commercial banks are under the control of the Houthis and their main centers are not transferred. "

"Raising the interest rate for any bank will be directed if the main headquarters in Sana'a have not moved to Aden and whether Sanaa banks will be committed to investing in the central bank of Aden," said economist Fekry Abdelwahid.

Loss of confidence

Economists stress that the central bank lacks the tools that may help it regain it functions in managing monetary policy, as well as the lack of trust between the central and commercial banking sector as a result of the bank's inability to repay the interest of investing in bonds and treasury bills four years ago.

The financial crisis caused by the war, the collapse of the riyal and the depletion of the cash reserve have shaken traders ' confidence in the banking system, resulting in reluctance to deal with local banks, the banks ' failure to deal with the central bank and their reluctance to increase their investment in Treasury bills since the end of 2015. Because of the low-interest rate on the authorizations and their need for liquidity to meet their customers ' requests.

For its part, the Yemeni commercial banking sector is demanding that the government pay the benefits of Treasury bills, and called for paying the government's commercial banks and private commercial sector debts the benefits of investing in treasury bills.

"The economy recovers when the private sector recovers, so we call on the central bank to pay its arrears to the Treasury Bills campaign, which will help save the Yemeni economy from collapsing and maintain the commercial activity of the sector," said Hasan al-Kaboos, president of the Sanaa Chamber of Commerce in a statement. . "

Due to the lack of revenues from oil and gas sales, taxes and foreign aid, the central bank has compensated for this by borrowing from banks through Treasury bills and has borrowed more than 1 trillion riyals since the beginning of the war until the central bank has ceased its work.

Fallout

If the central bank succeeds in regaining the confidence of the business sector and implementing its decision to raise interest rates, the decision will not stabilize the exchange rate and will not address the crisis of local currency decay, and will not leave any effects on inflation (price rises).

Banking experts said raising interest rates is just an indication that the economy is deteriorating, but the measure itself does not address the crisis of the riyal's collapse and may achieve the sole goal of withdrawing cash, which will not be done before the restoration of trust between the central and commercial banks.

The use of interest rates will not be feasible in a fragile and vulnerable economy such as Yemen's economy, but it is worsening, he said, "raising the interest rate will not cure the collapse of the riyal, but will freeze development projects and absorb liquidity if it is kept and re-spent in the bonds of debt the problem comes back as it was. "

Worsening public debt

The state is the most affected by the decision to raise interest rates, the government uses interest to borrow money from the commercial sector with high interest and this increases the burden of domestic public debt, which is not borne by the Government alone but is a burden on the country, development, the economy, and even individuals.

Since the beginning of the war three and a half years ago, Yemen has relied heavily on public debt instruments to finance the chronic gap in the state budget and, therefore, the balance and burdens of public debt have risen to alarming levels that have become a constraint on economic growth and development and bear great burdens on the present generation and generations Coming.

According to banking experts, every Yemeni population of 26 million will be owed about $1,500, given the rise in domestic public debt to dangerous levels. Public debt service has acquired social expenditures (education, health, social protection, and water) and has left no room for spending on social welfare programs and investment programs.

Finance expert Fekry Abdelwahid said that raising interest rates would be a consequence for commercial banks and the central bank, which would accumulate and multiply the service of local public debt, while banks are inactive, and as long as the difference in the exchange rate of the dollar between the official and the market would be better to maintain the prices Current interest ".


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