Inflation in urban parts of Egypt rose by 15 per cent in September compared to its level a year earlier. This is compared to 14.6 per cent in August and is considered to be the highest increase in almost four years.
When compared on a monthly level, the pick-up in inflation reached 1.6 per cent in September, almost twice its level in August, with food and beverages, the largest component in the basket of goods according to which inflation is calculated, recording a 2.3 month-on-month increase on the back of a surge in the prices of vegetables and dairy goods and eggs.
Meanwhile, food prices jumped by 21 per cent year-on-year.
However, higher food and beverage prices cannot be blamed for the higher inflation, as on an annual basis it hiked by 21.7 per cent. The rise in September’s headline number was driven entirely by non-food inflation, as it increased across most major non-food price categories, according to Capital Economics, a London-based macro-economy research house.
The increase in transportation costs came in at 18 per cent year-on-year and was “fuelled by increases in the cost of personal transportation and the purchase of transport equipment,” according to local investment bank Al-Ahly Pharos.
The restaurants and hotels component witnessed a 25 per cent year-on-year increase owing to higher costs for both catering and accommodation services.
The weakening pound is pushing the inflation rate higher. After the Central Bank of Egypt (CBE) devalued the pound by 16 per cent in March, it has been leaving it to depreciate gradually since then with the rate accelerating over the past month.
The pound is currently trading at LE19.7 to the dollar compared to LE15.7 in March.
A more flexible exchange rate is one of the main demands by the International Monetary Fund (IMF) in order to provide Egypt with a long-negotiated loan. The IMF deal has been negotiated since March with no deal in sight, with the exact negotiated value not yet known.
As worries about the currency mount, the CBE is mulling allowing Non-Deliverable Forwards (NDF) contracts to hedge against risks to the pound. The US news agency Bloomberg, which broke the news, defines NDFs as agreements between counterparties to buy or sell a currency at a pre-determined rate in the future but without actually exchanging the currency.
At maturity, profits or losses are netted by calculating the difference between the NDF rate agreed upon and the market rate at the time.
“Implementing the plan would provide local companies with a way to protect against bigger swings in the pound should Egypt adopt a looser exchange rate,” anonymous officials told Bloomberg.
Experts say that NDFs would help importers hedge against fluctuations in the value of the currency and that its introduction is an indicator that a devaluation is on the horizon as similar measures were taken before the 2016 devaluation.
In other moves aimed at maintaining foreign currency liquidity in the banking system, a handful of local banks including Egypt’s largest private sector bank CIB and the state-owned Banque Misr introduced ceilings on withdrawals and purchases using debit and credit cards abroad.
In another move aimed at attracting dollars to the banking sector, the National Bank of Egypt and Banque Misr have almost doubled the rates they offer on dollar-denominated certificates of deposits to 5.3 per cent on three-year certificates and 5.15 per cent on five-year ones.
All the moves are spearheaded by newly appointed CBE Governor Hassan Abdallah, who is faced with a severe dollar crunch manifested in the banking sector’s net foreign assets hitting new lows. NFAs fell by LE18.06 billion in August, resuming a near year-long decline to negative LE385.9 billion.
The CBE relies on NFAs, which represent banking system assets owed by non-residents minus liabilities, to help support the currency.
The spiralling increase in the inflation rates since the beginning of the war in Ukraine has turned real local interest rates, when adjusted for inflation, negative. This has undermined the appeal of the country’s treasuries to foreigners, leading to outflows of $22 billion for the local debt market in the last six months.
The Monetary Policy Committee of the CBE last month kept interest rates unchanged at its third consecutive meeting. It said that it would “temporarily tolerate” the inflation rate, which comes beyond its target of seven per cent (± two per cent) as the price hikes are the result of external supply-side pressures resulting from the war in Ukraine and not due to increased local demand.
Al-Ahly Pharos analyst Esraa Ahmed noted that the inflation outlook as a sole factor suggests that the CBE might prefer to keep the rates unchanged until further notice.
She wrote that recent global developments might ease some pressures on inflation, particularly imported inflation, as the UN Food and Agriculture Organisation (FAO) Food Price Index declined in September for the sixth month in a row and the prices of Brent crude oil declined from $97 per barrel in August to around $91 per barrel in September.
She added that expected changes in the exchange rate are more related to other factors that might be backed by an imminent agreement with the IMF or a threat to the inflation outlook triggered by global events such as any further increases in the oil price by the OPEC countries.
Capital Economics believes that the international trend of increasing rates as well as the weakened pound could lead the CBE to hike rates by 1.5 per cent early next year to reach 12.75 per cent.
*A version of this article appears in print in the 13 October, 2022 edition of Al-Ahram Weekly.
Short link: