The 10th of every month, the day when Egypt’s Central Agency for Public Mobilisation and Statistics announces the rate of inflation, is on the watch list for all the country’s economists, particularly over the past three years. 

Since Egypt’s agreement with the International Monetary Fund (IMF) and the floatation of the pound in 2016, the agency’s announcement of the inflation rate has been the source of much discussion. 

Inflation rose steadily and reached an all-time high of more than 30 per cent in the summer of 2017, with the IMF admitting it had not seen such high rates coming. However, that trend changed in 2019 when at the outset of the year inflation cooled to around 13 per cent, close to the range set by the Central Bank of Egypt (CBE) of nine per cent plus or minus three per cent. 

In the summer, annual headline inflation saw a clearly declining trend, reaching a 14-year low of 3.1 per cent in October. The rate then rose slightly for the first time in six months to 3.6 per cent in November 2019.

London-based economic consultancy Capital Economics said that Egypt’s “inflation will rise over the next year or so, but it will remain relatively subdued and is unlikely to go above the mid-point of the Central Bank’s target on a sustained basis.”

While prices have not gone down, they are now relatively stable. “Three years ago, every time I visited the supermarket, I had to pay more for the same products. I could not budget for the month,” said Cairo housewife Maha Ezzat. 

That was in the months following the floatation. However, today things are much better, as “there is hardly any increase in prices, and we have got used to the new price level and stopped comparing it to pre-floatation levels,” Ezzat said. 

But that does not mean she is buying more. “I am still not buying the same amounts or types of goods that I bought three years ago,” Ezzat said, explaining that her income, though it had increased, has not doubled, and she cannot afford to spend like she did three years ago. 

The pound lost half its value when it was floated in 2016 to reach LE18 per dollar. Today, it has appreciated by around 10 per cent to reach around LE16 per dollar.

In some instances, some products have seen their prices drop, including some basic commodities sold to ration-card holders as part of the government’s cash-transfer social safety net. Cooking oil, sugar, rice and flour are among the goods that saw their prices drop by around 10 per cent.

But some experts believe that the sharp drop in inflation this year is not necessarily healthy. Alia Al-Mahdi, a Cairo University economics professor, said the low inflation could have been triggered by a decline in effective demand. 

Increasing poverty rates translated into decreasing demand, she said, and recent data had showed poverty rates reaching 32.5 per cent, up from around 28 per cent in 2015. Al-Mahdi said that the floatation and the subsequent inflation had eaten into the purchasing power of the pound, thus negatively affecting demand. 

This had then affected production, with Al-Mahdi saying that some manufacturers were not operating at full capacity because of the lower demand. To correct this, she suggested opening up new venues for economic activity by enabling existing underdeveloped urban communities so that people are encouraged to move into them, creating more economic activity around them.

Economist Hani Tawfik agreed, explaining that the hike in prices on the back of the floatation coupled with what he described as an “unnecessary” hike in interest rates had caused costs to increase and thus prices, resulting in further economic slowdown. 

The increase in interest rates had attracted liquidity into savings and bank certificates, affecting trade and causing a recession. Those who had not put their money into the banks had turned to real estate as a store of value, encouraging developers to build more projects, including the state, Tawfik said. 

INTEREST RATES: Interest rates also changed this year and are now on a falling curve. After peaking at 18.75 per cent in the summer of 2017, since the beginning of 2019 the CBE has cut interest rates by a total of 450 basis points. 

“The reduction of policy rates… provides appropriate support to economic activity, while remaining consistent with achieving the inflation target of nine per cent, plus or minus three percentage points… and price stability over the medium-term,” a CBE Monetary Policy Committee (MPC) press release said in November.

Capital Economics said the CBE was likely to press ahead with its easing cycle at the MPC meeting this month. “We expect the CBE to lower its overnight deposit rate by 50 basis points, taking the rate from 12.25 per cent to 11.75 per cent,” it said. The MPC’s next meeting is scheduled for 26 December.

“We think that inflation will rise over the next year or so, but it will remain relatively subdued and is unlikely to go above the mid-point of the CBE’s target on a sustained basis,” Capital Economics said. The research firm had said in November that it expected price pressures to remain subdued in the coming period because it did not anticipate significant currency weakness. 

It said that the Egyptian pound had been one of the best-performing emerging market currencies this year, appreciating by more than 10 per cent against the dollar, adding that it would probably gradually depreciate again to LE18 per dollar by the end of 2020. The reasons included the fact that “the large administered price hikes of recent years won’t be repeated,” since most fuel prices are no longer subsidised and will now move in line with international oil prices.

The research firm expects the CBE’s overnight deposit rate to be cut to 10 per cent by the end of next year and be reduced further to 9.5 per cent by the end of 2021. 

The high interest rates had led to a larger budget deficit, greater public debt, and higher government debt-servicing costs. It had also led companies to suffer because they had had to pay higher interest rates on their borrowing, therefore affecting profits and financial positions, said Tawfik. 

The stock market had also suffered because any increase in interest rates “is the first and biggest enemy of the stock exchange,” he said. And because of the higher interest rates, people had chosen to deposit their money in the banks at the expense of direct and indirect investment, he added. 

Cutting interest rates was important, nonetheless, Al-Mahdi said, adding that investors were still borrowing at 16 per cent, which was much higher than in neighbouring countries. 

But she did not believe the slowdown in the economy could be corrected by expansionary monetary policies alone. Even if interest rates were zero, if expectations for the economy were negative, spending would not increase, she said. 

Moreover, she wanted to see the difference between the lending and deposit rates narrow. Currently, it is at six per cent, whereas in other countries it is between 1.5 and three per cent, she said. Lending is currently at around 16 per cent, whereas deposits are at around 10 per cent. 

Al-Mahdi wanted to see the gap in favour of deposits retained, whereby the CBE would cut the lending rate but keep the deposit rate relatively high to favour small investors such as pensioners who may be living off income from deposit certificates.

*A version of this article appears in print in the 26 December, 2019 edition of Al-Ahram Weekly under the title:  Inflation settles down