Withdrawing Liquidity through CBE Bids

Information
1. Oriental Weavers exported carpets for $10 and the exchange rate of the dollar = EGP 10.

2. Oriental Weavers have an account with the CIB, which has no other clients other than Oriental Weavers.

CIB’s Balance Sheet as of 31 December 2022
Assets
Banknote = EGP 100 ($10 x 10)
Liabilities
Weavers Deposit = EGP 100 ($10 x 10)

3. Oriental Weavers asked the CIB to exchange the $10 for EGP, but CIB doesn’t have EGP. For this reason, the CIB contacts the CBE to sell the $10 for EGP 100, coming straight from the printing press.

4. The CBE agreed and the form of its budget became as follows:
CBE Balance Sheet as of 31 December 2022
Assets
Dollar Reserve = 100 ($10 x 10 purchased from the CIB)
Liabilities
A banknote outside the central bank (in the CIB treasury) = 100

5. But after this operation, the CBE fears that the CIB has EGP 100 loanable, and this could lead to inflation.

6. The CBE decided to invite the CIB to deposit EGP 50 inside the CBE for a period of one week, subject to renewal in exchange for interest.

7. Withdrawal of liquidity by bid is equal in effect to the cancellation of a portion of the previously issued liquidity. 

Important principle: Banknotes are issued when the banknote is transferred from the possession of the CBE to other banks and the people, and the banknote is canceled (cancellation) when the banknote finds its way back to the central bank.

Balance Sheets
CIB Balance Sheet on December 31, 2022, in EGP
Assets
Banknote = 50
Deposit with the CBE = 50 (non-creditable)
Liabilities
Weavers Deposit = 100

CBE Balance Sheet on December 31, 2022, in EGP

Assets
Reserve = 100
Liabilities
A banknote outside the central bank = 50
Central Bids (Open Market Operations) = 50

It is worth noting that the Central Bank’s bids collected about 700 billion pounds at the end of July 2022.