Guarding against inflation

Safeya Mounir , Thursday 28 Oct 2021

Al-Ahram Weekly sounds out experts on moves to curb the effects of global inflation on the Egyptian market.

Guarding against inflation
Economists warn against a wave of inflation in the near term

Inflation in Egypt continued to climb in September, reaching its highest level in 20 months, according to data on the rising costs of food, healthcare, and education released by the Central Agency for Public Mobilisation and Statistics (CAPMAS).

The rate jumped to 6.6 per cent last month, up from 5.7 per cent in August, and registering the highest annual level since January 2020 when inflation reached 7.2 per cent.

Regulating the market by ensuring the availability of basic commodities is the only way to curtail inflation, according to Radwa Al-Swaify, head of research at Pharos Holding.

“The safety valve is to ensure there is no shortage in any of the basic commodities, especially food and beverages, which carry considerable weight in the consumer price indexes used to measure inflation. Any shortages of these products trigger immediate and unwarranted price hikes all around,” she said.

Even though inflation has reached its highest level in two years, it is still within the seven per cent (+/- 0.2 per cent) target set by the Central Bank of Egypt (CBE). Even so, a recent decision by the Automatic Fuel Pricing Committee (AFPC) to raise petrol prices by LE0.25, the third fuel price hike this year, has worried many.

Because of the decision, Al-Swaify expects that CAPMAS will register another rise in the consumer price index in October, as well as a spike in education costs which always occurs in the autumn after schools reopen. Nevertheless, she predicts that the annual urban inflation rate will remain within the 6.5 to seven per cent range.

Cairo University economics professor Alia Al-Mahdi agrees that making basic commodities available in the market at reasonable prices is the way to check inflation. However, she cautions that when imported commodities are involved, their prices will increase domestically as a consequence of price rises on the international markets unless the government steps in to subsidise them.

According to the Minister of Agriculture and Land Reclamation Al-Sayed Al-Qusseir, the prices of strategic commodities and animal feed have shot up because of rising freight and transportation costs. He urged producers to coordinate with the Ministry of Supply and other government agencies that operate distribution outlets in order to trim flow costs and enable products to reach consumers at as low a cost as possible.

“The main problem is with the logistical links relating to distribution,” Al-Qusseir said.

The government has not increased the price of gas used by factories. Mohamed Hassan, managing director of Blom Egypt Investments (BEI), describes this as an inflation-reducing decision since a rise in the fuel costs of factories would precipitate price increases in local products including fertilisers.

He added that a decision to increase interest rates would also curb inflation, adding that he believes such a decision could be taken at the beginning of the new year or in the event that inflation crosses the nine per cent threshold.

Other emerging markets have taken similar decisions, and Egypt, a market which attracts significant investment in government bonds, could also find it useful, Hassan said.

He added that he was pleased that the government has not raised the price of diesel. This is another inflation-checking decision, he said, since a rise in diesel would mean a rise in transportation and shipping costs and a consequent rise in consumer prices.

“Egypt won’t be affected by the global price hike in gas because Egypt produces enough of its own to supply the local market,” Noeman Khaled, associate director at Arqaam Capital, told Al-Ahram Weekly.  

However, Egypt is a net importer of wheat, the price of which has been climbing in global markets. Khaled said that if the government foots the difference between the current prices and the international price rises of this and other essential imported commodities, it will alleviate inflationary pressures.

Such a move would outweigh any increase in the budget deficit needed to finance it, he said. He also suggested that the government could enter into futures contracts with international firms whereby it commits to purchasing certain quantities of commodities at current rates for set periods in the future, while accepting the possibility that the future price might decrease below the contract one.

Khaled welcomed CBE initiatives to help small and medium-sized enterprises (SMEs) against the backdrop of rising interest rates. Last year, it set aside LE200 billion to offer loans to small businesses at low interest rates ranging from five to seven per cent.

Initiatives such as this could be a lifesaver for such businesses, he said, because higher interest rates combined with the rising prices of production inputs mean either passing on higher prices to consumers or cutting back operations.

As for ways that the state-owned banks could help individuals, Khaled advised the National Bank of Egypt, Banque Misr, and other public-sector banks to issue high-interest bank certificates. These would help to absorb liquidity and offset the impacts of inflation on the most vulnerable segments of the population, such as pensioners and other fixed-income groups, he said.

*A version of this article appears in print in the 28 October, 2021 edition of Al-Ahram Weekly

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