1 introduction

Money and BankingIntroduction

Chahir Zaki

FEPS, Cairo University

Second semester, 2012

Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 1 / 23

1 Introduction

2 Financial Markets

3 Banking

4 Money


Outline

1 Introduction

2 Financial Markets

3 Banking

4 Money


Introduction

To examine how financial markets such as bond, stock and foreignexchange markets work

To examine how financial institutions such as banks and insurancecompanies work

To examine the role of money in the economy


Outline

1 Introduction

2 Financial Markets

3 Banking

4 Money


Financial Markets

Financial markets: markets in which funds are transferred from peoplewho have an excess of available funds to people who have a shortageof funds.

Financial markets improve the allocation of capital by channelingfunds to entities which use capital most productive. This increasescapital productivity and economic efficiency. Hence well-functioningfinancial markets help accelerate economic growth.


Financial Markets

A bond: is a debt security that promises to make paymentsperiodically for a specified period of time

An interest rate: is the cost of borrowing or the price paid for therental of funds

Common stock: represents a share of ownership in a corporation. Ashare of stock is a claim on the earnings and assets of the corporation


Stock market: the Egyptian case

EGX 30 index, previously named CASE 30 includes the top 30 companiesin terms of liquidity and activity.

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Source: Constructed by the author using the stock market data.


Foreign exchange market

The foreign exchange market: is where funds are converted from onecurrency into another.

The foreign exchange rate is the price of one currency in terms ofanother currency

The foreign exchange market determines the foreign exchange rate


Foreign Exchange Market

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Source: Selim (2010)


Principal currencies

1998 2001 2004 2007 2010US dollar 86.8 89.9 88.0 85.6 84.9Euro ... 37.9 37.4 37.0 39.1Deutsche mark 30.5 ... ... ... ...French franc 5.0 ... ... ... ...ECU and other EMS currencies 16.8 ... ... ... ...Slovak koruna ... 0.0 0.0 0.1 ...Japanese yen 21.7 23.5 20.8 17.2 19.0Pound sterling 11.0 13.0 16.5 14.9 12.9Australian dollar 3.0 4.3 6.0 6.6 7.6Swiss franc 7.1 6.0 6.0 6.8 6.4Canadian dollar 3.5 4.5 4.2 4.3 5.3Hong Kong dollar 1.0 2.2 1.8 2.7 2.4Swedish krona 0.3 2.5 2.2 2.7 2.2Other 13.3 16.1 17.0 22.0 20.5Total 200.0 200.0 200.0 200.0 200.0


Outline

1 Introduction

2 Financial Markets

3 Banking

4 Money


Banking

Financial Intermediaries: institutions that borrow funds from peoplewho have saved and make loans to other people

Banks: institutions that accept deposits and make loans

Other Financial Institutions: insurance companies, finance companies,pension funds, mutual funds and investment banks

Financial Innovation: in particular, the advent of the information ageand e-finance


Banking sector: the Egyptian case

Number of Banks

and Banking Density

End of June 2004+ 2005 2006 2007 2008 2009

Total Number of Banks Operating in Egypt 61 52** 43*** 41*** 40*** 39***

Total Number of Branches 2783 2841 2944 3056 3297 3443

Banking Density+ 24.9 24.8 24.5 24.2 22.9 22.3

Number of Public Sector Banks 7 7 7 6 6 5

Number of Branches of Public Sector Banks 2153 2185 2222 2074 2089 2088

Number of Private Sector Banks 35 34 29 28 27 27

Number of Branches of Private Sector Banks 571 607 674 930 1145 1270

Number of Private and Joint venture Banks 19 11 7 7 7 7

Number of Branches of Private and Joint venture Banks 59 49 48 52 63 85

*Population in thousand / Banking unit.

+ Egyptian banks abroad are not included , also two banks established under private laws and are not

registered with CBE :the Arab International Bank,and Nasser Social Bank .

** The decrease was because seven branches of foreign banks ended their

business.

*** The decrease was because seven branches of foreign banks ended their

business.

Source: CBE (2011)


Outline

1 Introduction

2 Financial Markets

3 Banking

4 Money


Money and Monetary policy

Evidence suggests that money plays an important role in generatingbusiness cycles. Recessions (unemployment) and booms (inflation)affect all of us

Monetary Theory ties changes in the money supply to changes inaggregate economic activity and the price level.

The government uses monetary policy to influence economicaggregates.


Monetary Policy and Inflation

The aggregate price level is the average price of goods and services inan economy

A continual rise in the price level (inflation) affects all economicplayers

Data shows a connection between the money supply and the pricelevel

Interest rates are the price of money


Money and Monetary policy

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Source: Constructed by the author using the CBE data.


Banking sector: the Egyptian case58 Central Bank of Egypt – Annual Report 2009/2010

Source: CAPMAS

The inflation of food and non-alcoholic beverages accelerated to 18.5 percent

in the reporting year (from 12.2 percent in the previous FY). In spite of the fall in international food prices by 4.8 percent in the reporting year, it did not curb the rise in inflation rate at the domestic level, indicating the weak response of local markets to the changes in international food prices, especially when they take a downturn.

Source: IMF

The rise in the share of food and non-alcoholic beverages was ascribed to

stronger contributions of most subgroups, especially vegetables (3.9 percentage points against 1.7 point) and meat and poultry (2.8 points against 1.5 point). However, declines were observed in the groups of fish (-0.2 point against 0.7 point) and fruits (0.9 point against 1.4 point).

Annual CPI and Price Index of Food & Non-Alcoholic Beverages (Urban)

4

8

12

16

20

24

Jun.2

009

July

Aug.

Sep.

Oct. Nov.

Dec.

Jan.

Feb.

Mar. Apr. MayJu

n.2010

%

All Items Food & Non-Alcoholic Beverages

International and Domestic Prices of Food (Change Rate)

-30.0-25.0-20.0-15.0-10.0-5.00.05.0

10.015.020.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008/2009 2009/2010

%

International PricesDomestic Prices

Source: CBE (2011)


Banking sector: the Egyptian case

58 Central Bank of Egypt – Annual Report 2009/2010

Source: CAPMAS

The inflation of food and non-alcoholic beverages accelerated to 18.5 percent

in the reporting year (from 12.2 percent in the previous FY). In spite of the fall in international food prices by 4.8 percent in the reporting year, it did not curb the rise in inflation rate at the domestic level, indicating the weak response of local markets to the changes in international food prices, especially when they take a downturn.

Source: IMF

The rise in the share of food and non-alcoholic beverages was ascribed to

stronger contributions of most subgroups, especially vegetables (3.9 percentage points against 1.7 point) and meat and poultry (2.8 points against 1.5 point). However, declines were observed in the groups of fish (-0.2 point against 0.7 point) and fruits (0.9 point against 1.4 point).

Annual CPI and Price Index of Food & Non-Alcoholic Beverages (Urban)

4

8

12

16

20

24

Jun.2

009

July

Aug.

Sep.

Oct. Nov.

Dec.

Jan.

Feb.

Mar. Apr. MayJu

n.2010

%

All Items Food & Non-Alcoholic Beverages

International and Domestic Prices of Food (Change Rate)

-30.0-25.0-20.0-15.0-10.0-5.00.05.0

10.015.020.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008/2009 2009/2010

%

International PricesDomestic Prices

Source: CBE (2011)


Monetary Policy and Fiscal Policy

Monetary policy:

is the management of the money supply and interest ratesConducted in Egypt by the Central Bank of Egypt (CBE)

Fiscal policy

is government spending and taxationBudget deficit is the excess of expenditures over revenues for aparticular yearBudget surplus is the excess of revenues over expenditures for aparticular yearAny deficit must be financed by borrowing


Fiscal policy

62 Central Bank of Egypt – Annual Report 2009/2010 3/3: Consolidated Fiscal Operations of the General Government During FY 2009/2010, the fiscal policy aimed at stimulating the economic activity to cushion the adverse effects of the global economic crisis. To this end, two additional packages of fiscal stimulus measures were introduced. The first package, totaling LE 15.0 billion, was used during FY 2008/2009 to finance public investments, especially infrastructure and public utility projects. The second package (around LE 5.5 - LE 6 billion) was pumped in the current FY to finance additional investments. The third package (a new supplementary appropriation of LE 10.0 billion) was approved to meet additional investment requirements, particularly potable water and sanitation; roads; the Hinterland villages and Nuba housing projects.

During the reporting year, total government expenditures increased by 4.1 percent above the level of the previous FY, to register LE 366.0 billion or 30.3 percent of GDP. By contrast, public revenues fell by 5.1 percent to LE 268.1 billion, representing 22.2 percent of GDP. Consequently, the overall budget deficit widened to LE 98.0 billion or 8.1 percent of GDP during the reporting year, from LE 71.8 billion and 6.9 percent a year earlier. Such developments reflect the increasing ratio of overall deficit/GDP. It is worthy to mention that the fiscal policy aims to reduce such ratio to as low as 3.5 percent by FY 2014/2015, as a prerequisite for decreasing the ratio of domestic public debt/ GDP.

Hereunder is a follow-up of the execution of the consolidated fiscal operations of the general government in FY 2009/2010, according to the preliminary actual data of the Ministry of Finance:

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10.0

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35.0

40.0

2005/2006 2006/2007 2007/2008 2008/2009 2009/2010

Revenues Expenditures Deficit

Ratios of Expenditures, Revenues & Overall Deficit / GDP%

Source: CBE (2011)


References

Mishkin, Introduction

Mishkin, chapter 1.

Central Bank of Egypt.


1 introduction

Economy & Finance

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