Inflation up, ratings down

Niveen Wahish , Friday 17 Feb 2023

Strategies had been adopted to reduce inflationary pressure.

Inflation up, ratings down
Inflation is at five-year highs


Maissa Mohamed, a middle-class mother of three, has started stocking up on food in preparation for Ramadan. To avoid being stuck with enormous bills during the holy month, whenever she goes grocery shopping, she buys a few extra items to store. While in the past she would have served either meat of chicken at every Iftar, this month she is not sure. “Meat is around 50 per cent more expensive, while chicken has doubled in price compared to a year ago,” says Mohamed. Inflation, which rose to 25.8 per cent up from 21.3 per cent in December, is the highest in five years.

According to the Central Agency for Public Mobilisation and Statistics, the cost of food and beverages was 10 per cent higher in January than in December, as inflation on essentials surged to 48 per cent. Core inflation, as computed by the Central Bank of Egypt (CBE), was 31.2 per cent, up from 24.4 per cent. Inflation has been on an upward trajectory since early 2022, propelled by Covid-19 supply chain disruptions, the fallout from the war in Ukraine, including hard currency shortages and costlier commodities, and the devaluation of the pound.

“Prices are so high that this Valentine’s social media is rife with memes about gifting chickens and eggs rather than chocolates,” joked Mohamed.

Mohamed Sedik, managing director of Analytica Holding for Financial Investments, believes that in the absence of any new shocks, local price rises will cool in tandem with global inflation. The International Monetary Fund (IMF) expects global inflation to drop from 8.8 per cent in 2022 to 6.6 per cent in 2023 and decline to 4.3 per cent in 2024. Inflation was 3.5 per cent before the pandemic.

As a net food importer which also depends on imports for production inputs and many finished products, Egypt has been badly affected by global inflation, explains Sedik. In the back of supply chain disruptions and the war in Ukraine, inflation reached a 40-year high in the US last year and rose to around 10 per cent in the European Union, up from less than two per cent in 2018.

Econometric models project that Egypt’s inflation rate will hit 33 per cent by the end of this quarter, drop to 8.5 per cent in 2024 and 6.5 per cent by 2025. But the projections depend on other factors remaining equal, cautions Irina Tsukerman, president of Scarab Rising Inc, a media and security strategic advisory group. They also assume the war in Ukraine will end some time in 2023, ending disruptions in grain delivery and energy prices, and that other supply chain-related issues will stabilise. She adds that international arrangements are being put in place to address food shortages and other humanitarian concerns which, in theory, should advance the return to normalcy, but warns it is not clear what will happen should the war in Ukraine turn into one of attrition that continues to threaten supply chains and deliveries of essential products.

She suggests that Egypt should invest in renting in, or collaborating with, states where the cost of growing basic foodstuffs is low and there is little risk of disruption. This could alleviate shortages and bridge the gap for basic commodity deliverables until local production increases.

“The trajectory in Africa is likely to be geared towards more local agricultural investments and local production than dependency on outside exports,” she notes.

In an attempt to combat rising prices, the government is making basic commodities available at discounted prices through its own outlets. Last week, the minister of supply and internal trade said Egypt has enough wheat and sugar to cover its needs for months. But while this helps address the needs of the most vulnerable segments of the population, it is not going to bring down prices, notes Tsukerman.

While acknowledging the inflationary impact of the devaluation of the pound, Sedik says policy-makers appeared to have learned a lesson about overprotecting the currency. The Egyptian pound has been devalued three times since March 2022 and is now trading at LE30 to the dollar, compared to LE16 back in March. The difference between inflation in Egypt and inflation in Egypt’s trading partners should be an indicator of how much the pound is allowed to slide annually, argues Sedik.  

The flexible exchange rate is like a car bumper in that it absorbs external shocks. Prices increase as the local currency loses value, but it is advantageous in attracting foreign direct investments which create jobs and transfer know-how, and makes tourism to Egypt more appealing.

“Reduced external buffers and shock absorption capacity while the economy undergoes a structural change towards a more export- and private sector-led growth model under a flexible exchange rate regime,” was the reason cited by global credit rating agency Moody’s for downgrading Egypt’s credit rating from B2 to B3. A B3 rating is the lowest most investors will accept, according to Investopedia.

Moody’s said foreign exchange liquidity was lower than in 2022, “increasing external vulnerability at a time of fragile global conditions”, and noted that foreign reserves stand at $34.2 billion compared to $35.5 in May 2022. On a positive note, the rating agency changed the outlook from negative to stable. While “liquidity risks [are] reflected in tight international capital market conditions, as well as higher domestic borrowing costs and social spending pressures in an inflationary environment,” they are being offset by “the implementation of stated competitiveness reforms that may enhance the economy’s export base and support foreign direct investment inflows which, in turn, would enhance the economy’s external debt carrying capacity and sustainably reduce the economy’s external vulnerability risks.”

According to Tsukerman, Egypt’s rating may be of concern to creditors but as long as the government continues to display an ability to meet debts it is unlikely to turn into a major long-term problem.

Moving forward, Sedik says Egypt’s best option to bring in hard currency lies in boosting manufactured exports. While political will is strongly behind such a strategy, more needs to be done on the ground to make it happen.

“Competition from neighbouring countries from Morocco to the Gulf for investment is tough,” he warns. But Egypt clearly intends to pull out all the stops. Last week the government announced it was offering investors stakes in 32 companies as part of its plans to broaden private sector participation in the economy and bring in much needed hard currency.

* A version of this article appears in print in the 16 February, 2023 edition of Al-Ahram Weekly

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