Importing inflation

Safeya Mounir , Thursday 17 Jun 2021

Inflation is expected to grow in the coming period on the back of increases in the global prices of raw materials and commodities

Importing inflation
Importing inflation

“It is only a matter of time before prices skyrocket once more,” said Hani Tawfik, head of Egypt’s Direct Investment Association, in a comment this week.

“Globally, the prices of raw materials, commodities, minerals, fuel, and the cost of shipping and aviation have increased by more than 100 per cent,” Tawfik wrote on Facebook, anticipating a hike in Egypt’s domestic inflation in the coming months.

According to a report by the US financial service Bloomberg, metal prices increased by about 72 per cent in May, recording their highest average in nine years. The price of copper also rose by 89 per cent, iron by 116 per cent, and nickel by 41 per cent. The prices of energy products such as natural gas, fuel, and coal also recorded noticeable spikes.

Bloomberg said that the temporary stoppage of mining operations owing to the Covid-19 pandemic had resulted in a hike in freight prices to levels unprecedented in the past 10 years. The price rises were primarily the result of congestion at major ports, quarantine restrictions, ongoing problems with freight crews, and rebounding fuel prices, it said.

The price of oil hit a 32-month high earlier this week, reflecting recovered demand in the US and Europe as Covid-19 vaccine rollouts continue.

Freight prices also increased due to the fact that many ships have been scrapped or sold as a result of work stoppages, the recovery of demand in the West, and the suspension of shipping chains, Tawfik said, adding that these are the same reasons that will drive the anticipated rise in inflation.

“Demand has increased in countries that have recovered from the pandemic, while demand for basic commodities in states that have seen a further spread of the coronavirus, such as India, has retreated,” he stated.

Egypt imports the majority of its needs of raw materials, on top of which is cooking oil, 95 per cent of which is imported from abroad. This drove the government to increase the price of one litre of subsidised cooking oil by 23.5 per cent to LE21 on 30 May, following the global rise in raw oil prices.

In May, inflation in Egypt’s urban areas increased to 4.8 per cent from 4.1 per cent in April as a result of price hikes of food and beverage items and the knock-on effects of the global rise in prices, said the Central Agency for Public Mobilisation and Statistics (CAPMAS).

Radwa Al-Sweify, a macroeconomic analyst with Pharos, an investment bank, expects inflation rates to rise in the coming months and to regress in the last three months of 2021 unless freight and raw materials prices continue to rise.

She expects Egypt’s inflation rates to stabilise at seven per cent.

Alia Mamdouh, a senior economist at Beltone, an investment bank, forecasts a rise in inflation rates starting in the second half of the year and a further increase by the end of the year. Companies started to import raw materials and basic commodities at the new, higher prices, in the second quarter of the year after they had run out of stocks, she added.

However, prices will not reach “catastrophic” levels, Mahmoud said, given that inflation rates have not been particularly high over the past few months. Nonetheless, they are expected to increase at a higher pace by the first quarter of 2022, she added.

Inflation rose in April by 1.2 per cent. Annual inflation, however, retreated last month to 4.4 per cent, down from 5.9 in the same month of 2020, and in March it rose by just 0.6 per cent.

The rising inflation will not only increase prices, but will also force the Central Bank of Egypt (CBE) to raise interest rates to limit inflationary pressures and encourage people to save and lower their consumption. This will also maintain the flow of foreign investments in Egyptian debt instruments and prevent investors from avoiding Egypt if interest rates rise elsewhere, Tawfik said.

However, this scenario will not be appealing to the government, the CBE’s largest debtor, as it shoulders LE50 billion in additional losses to its ailing budget for every one per cent rise in interest rates. It is also no secret that higher interest rates are primary foes of investment, consumption, and production.

Al-Sweify and Mamdouh expect the CBE to maintain its current interest rates at the 17 June Monetary Policy Committee meeting, adding that they will nevertheless likely change at the committee’s subsequent meetings.

*A version of this article appears in print in the 17 June, 2021 edition of Al-Ahram Weekly

 

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