Egypt’s annual headline inflation rates are expected to continue recording single digits and to remain around the Central Bank of Egypt (CBE)’s target, which is 7 percent, until the fourth quarter of FY2021/2022, the CBE announced in its monetary policy report.
The CBE built its projection for the interest rates on Egypt’s GDP growth that is expected to be lower in the current FY2020/2021 — which ends in June — than FY2019/20, driven by the impact of COVID-19 and its related containment measures on the economy.
In addition, the CBE expected Egypt’s gradual recovery to start in FY2021/22, with a pickup in tourism from the supply side and private domestic demand from the demand side, alongside a gradual dissemination of coronavirus vaccines.
Egypt’s annual headline inflation decelerated to 0.9 percent in the fourth quarter of 2020, down from 1.3 percent in the second and third quarters of the year, according to the report.
On the other hand, Egypt’s current account deficit widened to $2.8 billion in the third quarter of 2020, growing by 27.2 percent, compared to the preceding quarter, according to the report.
“The widening of the deficit is only expected to be temporary since tourism is expected to gradually recover over the next couple of quarters, as countries expand the vaccination coverage of their respective populations. Meanwhile, the widening of the current account deficit was cushioned by the positive contributions of remittances, as well as the hydrocarbon and investment income trade balances,” the report explained.
The report said that Egyptian expats’ remittances rose by 21 percent, while the investment income trade deficit narrowed by 6.3 percent on annual terms as a result of a decline in investment income payments and in particular, a decrease in profit repatriation by foreign oil companies.
These actors are contributing positively to the current account balance, according to the report.
For the net services surplus, the report said it narrowed sharply on annual terms in the third quarter of 2020, declining by 78 percent and extending its declining trend for the fifth consecutive quarter.
The report attributed this to the significant decline in travel receipts, caused by the enactment of travel restrictions globally to contain the COVID-19 pandemic, while the deterioration in the net services surplus was compounded by the combined unfavourable contributions of net transportation, the Suez Canal, and government receipts.
On the other hand, Egypt’s financial account continued to recover in the third quarter of 2020, registering a sizable surplus of $4 billion due to the strong resumption of net portfolio inflows into the Egyptian domestic debt market, according to the report.
“The strong recovery in portfolio investments came after it had witnessed substantial outflows and limited inflows during the first and second quarters of 2020, respectively”, said the report.
On the fuel side, the report noted that the cost-recovery for most fuel products has already been achieved.
On the global level, economic and financial conditions are expected to remain accommodative and supportive of economic activity over the medium term, although, global yield curves have steepened recently, according to the report.
Capital flows into emerging markets have continued to recover following the sharp slump in March 2020, which witnessed the sharpest outflows on record since 2008, according to the report.
“The rollout of news regarding vaccine efficacy and distribution and the accommodative global financial conditions have supported the resumption of inflows into emerging market economies,” said the report.