Inflation at its highest

Ahmed Kotb , Tuesday 15 Mar 2022

Egypt’s main inflation rate hits its highest level in almost two and half years in February, reports Ahmed Kotb

Inflation at its highest
Inflation at its highest

The rate of annual urban inflation, Egypt’s main inflation gauge, rose to 8.8 per cent in February, compared to 7.3 per cent in January 2021, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS).

The rate, the highest in 31 months, was mainly fed by the rising cost of food.

Food price inflation also recorded its highest level since November 2018, rising by 17.6 per cent year-on-year, compared to 12.4 per cent in January, with significant increases mainly in vegetables and cooking oil and meat, according to CAPMAS data.

According to Esraa Ahmed, an analyst at the Al-Ahly Pharos Holding investment bank, the rise in inflation locally is a result of its global increase, especially in the prices of basic commodities.

After the Covid-19 coronavirus pandemic began to recede and life began to gradually return to normal, she added, there was an acceleration of pent-up demand and an inability of supply to meet the world’s needs due to global supply chain bottlenecks.

She also pointed out that the outbreak of war in Ukraine had made things worse as it threatens the supply of a number of basic commodities, such as grains and cooking oil, driving their prices higher and contributing to the record increase in local inflation.

Egypt is a large importer of grains, especially wheat, as well as cooking oil.

In order to cope with the short supply of basic commodities and thus limit the increase in their prices, the government has been working on different levels. Nevine Gamea, the minister of trade and industry, issued two separate decisions on 10 and 12 March, by which the export of eight basic commodities will be stopped for a period of three months.

The commodities are wheat, flour, cooking oil, corn, lentils, pasta, beans, and flour.

“We expect inflation to remain at around nine to 10 per cent during the coming period, especially with the approach of Ramadan, which witnesses an increase in consumption,” Ahmed said.

Hani Tawfik, an economist, believes that widespread expectations that the banks are on the way to raise interest rates to 15 per cent to counter inflation might not help current inflation.

The Central Bank of Egypt (CBE) decided over the course of 10 previous meetings of its Monetary Policy Committee (MPC) to keep its interest rates unchanged at 8.25 per cent for deposits and 9.25 per cent for lending.

Tawfik said that the current inflationary wave was caused by the high cost of goods and supply shortages, and therefore raising Egypt’s interest rates, already among the highest in the world, with the aim of limiting demand will not solve the problem but may instead lead to stagflation due to an increase in prices accompanied by a decline in purchasing power.

He said that high interest rates are a monetary tool used to withdraw liquidity and thus reduce demand in the case of inflationary pressures resulting from the full employment of production factors, the availability of liquidity, and the increase in consumer demand.

The current case is different.

“We expect the CBE to raise interest rates by about 150 basis points during the coming period to limit the impact of an anticipated second round of inflation (backed by strong pressures on foreign exchange and limited dollar liquidity), so that it does not exceed the required target,” Ahmed said.

Currently the CBE has an inflation target that ranges between five and nine per cent.

In general, Ahmed stated, the current form of inflation is imported and its causes are outside the scope of domestic policies, but the government can attempt to mitigate its effects by tightening control over the markets to prevent traders attempting to exploit the situation in a way that affects domestic supply and increases the pace of price increases.

“The decision to prevent the export of goods may contribute to providing more local supply, but in the end it is a temporary solution that is more suitable only in the short term,” she said.

Egypt’s prime minister, Mustafa Madbouli, said that the Ukrainian crisis was being felt in all countries in the form of high inflation rates and that all international financial institutions were talking about significant impacts on the global economy.

He said in a press statement that wheat prices had increased by about 48 per cent since the outbreak of the Ukrainian crisis, while oil prices have risen by 56 per cent, in addition to the rise in the prices of many other commodities such as cooking oil, sugar, poultry and meat.

“Wheat prices increased by 48 per cent per ton, corn by 30 per cent, sugar by seven per cent, poultry by 10 per cent, and petroleum by 55 per cent in the first two weeks of the crisis,” Madbouli pointed out.

He said that Egypt was affected by inflation like the rest of the world, noting that 35 per cent of the inflation that occurs in Egypt is due to reasons linked to external factors.

“The government is aware of citizens’ complaints about prices and is working to ensure that the state absorbs the negative impact of the inflation waves,” Madbouli said, adding that an agreement had been reached with officials at the Egyptian Chambers of Commerce that fair prices should be charged for goods.

Ahmed Al-Basha, head of the agricultural crops division at the Cairo Chamber of Commerce, said that the decision to halt exporting basic commodities for the next three months was a natural response in the light of the repercussions of the war between Russia and Ukraine, adding that many countries are now moving to stop exporting a number of commodities to provide them to local markets.

“Despite its effects on exporters, the decision will help in efforts to stabilise prices in the local market,” he said.

Consumption in Ramadan is normally about three times that during the rest of the year, and prices normally would go up by between five and 10 per cent accordingly. However, Al-Basha said, circumstances this year will likely lead to more price hikes.

The spokesperson for Egypt’s cabinet said in a press statement that the government has good stocks of basic goods that will be sufficient for the rest of the year.

It will work during the coming period to provide the markets with large quantities of goods so that supply remains greater than demand, he added.

*A version of this article appears in print in the 17 March, 2022 edition of Al-Ahram Weekly.

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