1. Due to government expenditures being higher than its revenue, the government incurs an annual deficit called the budget deficit.
2. In 2022/23, the expected budget deficit in Egypt is about EGP 550 billion.
3. To finance this deficit, the government borrows from banks by offering securities that can be bought and sold before their maturity date among investors.
4. The ability to buy and sell before the maturity date is what increases the demand for the security at the time of its offering. The investor’s ability to convert his investment into cash at any time, and not only on the maturity date, eases the investor’s worries regarding liquidity.
5. The Egyptian government offers two types of securities for weekly borrowing from banks:
a. Treasury bills = a loan in the form of a security that is repayable up to a maximum of one year. It is issued on Sunday and Thursday of every week.
b Treasury bonds = a loan in the form of a security that is due to be repaid in a period of more than one year and is issued every Monday.
6. The holder of T-bills does not earn periodic cash distributions (coupons) like the bondholder but rather earns a difference between the purchase price and the selling price. For that reason, the bills are offered at a price less than the so-called par value, and the difference is the implicit interest rate.
Example
1. The interest rate set by the CBE = 10% deposit and 11% lending (minimum and maximum corridor rate).
2. The government wants to borrow about EGP 90 this week by issuing 1 treasury bill with a face value of EGP 100.
3. Therefore, the government invites banks (through the CBE, which manages bids on behalf of the government) to submit their bid for the purchase of 1 treasury bill with a nominal value = EGP 100 due after a year.
4. Three banks submitted offers to buy the security:
CIB = EGP 92
National Bank of Egypt = EGP 91
Banque Misr = EGP 90
5. Who will receive the T-Bill?
CIB as they will pay the government EGP 92 now and take the nominal value = EGP 100 after a year, meaning that the interest rate = 8/92 = 8.7%
The interest required from the National Bank and Banque Misr is higher.
National Bank of Egypt → 9/91 = 9.8%
Banque Misr → 10/90 = 11%
The goal of the government when borrowing is to reduce the cost as much as possible.
Treasury Bills
