Tax change in Egypt could prompt banks to increase private lending

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According to Reuters, economic analysts have proposed that a change to the way Egypt taxes bank profits, could encourage lenders to boost credit to the private sector and push up yields on Treasury debt, a situation they say will appeal to foreign investors.

The cabinet gave a preliminary approval to a proposed amendment to the way bank taxes are calculated by scrapping a provision that lets local banks deduct taxes already paid on treasuries from their bottom-line income tax.

If the final measure is approved by the parliament, it would raise the cost of buying government securities and could induce banking entities to divert funds away from treasuries to other sectors.

Hany Farahat, senior economist at investment bank CI Capital noted that “the law would push banks to lend more toward the private sector”. Economists revealed that for years, Egyptian banks have been top-heavy on government lending at the expense of the private sector.

The proposed tax change, which hit local banking stocks when it was announced on Sunday, could also put pressure on the Finance Ministry to allow Treasury yields to rise as it seeks to finance a budget deficit that was 9.8 percent of GDP in the fiscal year ending June 2018.

A research note released by Arqaam Capital said “the new bank levy may increase the T-bill rates by 200 bps(basis points) as they see higher pre-tax yields”.

Analysts suggest that the development might bring in more foreign investors, who cut their holdings in Egyptian treasury bills and bonds by $8 billion in the six months ending September to $13 billion, part of a global exit from emerging market debt.

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