Inflation pressure continues

Doaa A. Moneim, Tuesday 12 Apr 2022

The present wave of inflation could last through early 2023, experts tell Doaa A. Moneim

Egypt s inflation rate

Egypt’s headline annual inflation rate jumped to 12.1 per cent in March, up from 4.8 per cent in the corresponding month of 2021, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced on Sunday.

The CAPMAS figures also showed inflation in urban areas rose to 10.5 per cent in March, up from 8.8 per cent in February. The agency attributed this increase to significant rises in the prices of food and beverages, transport, education, entertainment and culture, and hotels and restaurants.

Meanwhile, the annual core inflation rate computed by the Central Bank of Egypt (CBE) rose to 10.1 per cent in March, compared to 7.2 per cent in February. Core inflation does not include volatile items such as fruit and vegetables.

Inflation readings announced by both CAPMAS and the CBE surpassed the limit of seven per cent (±2 per cent) set by the CBE through end of 2022, representing the highest level reached in nearly 36 months.

Radwa Al-Swaify, head of research at Al-Ahly Pharos, an investment bank, expects urban inflation to continue its acceleration through January 2023 before starting to deaccelerate to below nine per cent as of February 2023.

The significant rise is expected amid food and beverage price hikes globally, as well as the rise in the prices of production inputs, she told Al-Ahram Weekly. The urban inflation rate is projected to rise incrementally over the coming months to reach its highest level in August 2022 to hit 12 per cent on an annual basis, Al-Swaify added.

Meanwhile, Egypt’s headline purchasing managers’ index (PMI) for the non-oil private sector dropped to 46.5 in March, down from 48.1 in February, indicating a significant decline in the health of the country’s non-oil economy, S&P Global, a ratings agency, reported last week.

S&P attributed the strong decline to the amplifying of inflationary pressures on energy, food, and raw materials amid the Russian-Ukrainian conflict, which has led to sharp decreases in output and new orders in the sector locally.

But Al-Swaify said that the inflation hike is temporary and is affected chiefly by global supply chain disruptions, supply decline, and the hike in global energy prices, which has impacted industries that depend on energy as a production input.

As a result of the Ukrainian war, oil prices have surged by 6.7 per cent to around $100 per barrel.

Responding to the ongoing challenges, the CBE’s Monetary Policy Committee (MPC) raised key interest rates in an unscheduled meeting held in March by one per cent (100 bps) and allowed the Egyptian pound to depreciate against the US dollar by about 16 per cent, the lowest in five years.

Al-Swaify expects the CBE to introduce an additional one per cent (100 bps) interest rate hike at its next MPC meeting scheduled for 19 May.

In a recent report, Fitch Solutions, a ratings agency, raised its projections of Egypt’s inflation rate in 2022 to 10 per cent, up from the 7.1 per cent it expected in February, the third highest inflation rate in the region following Lebanon and Iran.

Interest rates and the foreign exchange rate are key instruments for Egypt to absorb the inflationary pressure caused by the Ukrainian conflict, Ahmed Moaty, CEO of VI Markets Egypt, a global online broker, told the Weekly.

Moaty projected the country’s inflation to inch up by between two per cent and five per cent over the medium term amid the ongoing challenges. “April’s inflation reading is expected to reflect the full impact of the conflict,” Moaty explained.

For the MPC’s upcoming meeting, Moaty predicted the committee would raise interest rates for a second time since the onset of the Ukrainian war as an instrument to decrease the liquidity in the local market, lowering demand for products and, subsequently, keeping price stability amid the inflationary wave.

“The CBE is expected to hike its key interest rates by between one to two per cent (200 bps) in 2022 to preserve market stability,” Moaty predicted.

He explained that the US Federal Reserve’s policy of tightening its monetary policy, with expectations that it would raise interest rates by five per cent (500 bps) through the end of 2022, has led to a surge in foreign direct investment (FDI) outflows from the emerging markets, including Egypt.

In March, the Fed increased interest rates by 0.25 per cent (25 pbs) as a first step to deal with elevated inflation.

The CBE coped by devaluing the Egyptian pound and raising interest rates to preserve investments, Moaty said, adding that the CBE moves represented advantages for current investors and should also attract fresh foreign investment inflows, especially in debt instruments.

Responding to the pressures of the ongoing global economic challenges, the government lowered its real GDP target for the 2022-23 financial year, which starts on 1 July, to 5.5 per cent, down from 5.7 per cent, saying that it plans to contain the inflationary wave.

One of procedures it has taken is requesting International Monetary Fund (IMF) assistance in designing a new programme to back the national economy and preserve the gains of the country’s first wave of reforms.

Moreover, according to Moaty, the depreciation of the Egyptian pound should attract much-needed tourism, which is also impacted by the conflict in Ukraine and its associated repercussions.

Al-Swaify said that ensuring the availability of basic commodities in the domestic market and monitoring it was a key step in coping positively with the crisis.

Despite the drop in the CBE’s net international reserves (NIRs) to about $37 billion by the end of March, down from $40.9 billion in February, the CBE said that they still covered over five months of imports.

“In the wake of the Russia-Ukraine crisis and in line with the CBE’s mandate to maintain price stability, the CBE decided to temporarily mobilise its excess foreign currency reserves to calm the markets during periods of exceptional stress caused by exogenous factors, similar to the actions that were taken during the emergence of the Covid-19 pandemic,” the CBE stated.

* A version of this article appears in print in the 14 April, 2022 edition of Al-Ahram Weekly.

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