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Monday, 30 January 2023
Egypt’s Inflation Rate spikes in March Amid Ukraine War

Egypt’s Inflation Rate spikes in March Amid Ukraine War

2022-10-31

 

Egypt’s inflation rate spiked in March, with food and fuel prices rising by 15-20 percent, according to local media. The Egyptian central bank cut the key interest rate by 25 basis points on March 7 to support the currency and support the struggling inflation rate. However, the cut only lasted a few days, and the rate has since been hiked another 25 basis points. The Central Bank Governors have warned that the hike was necessary to stabilize the currency, which has been fluctuating wildly in value. The Egyptian pound has been fluctuating wildly in value, from $1.00 to $0.80 to over $1.00, as the Egyptian economy has struggled under the weight of high inflation and a series of political and social unrest. The drop in the pound has not helped, and the Central Bank has to date failed to implement a coherent strategy to reduce the soaring inflation. Read on for the details.

What is the current rate of inflation in Egypt?
In a recent press release, the Central Bank of Egypt (CBE) announced that inflation in Egypt rose to 15.9 percent in March 2017, compared to 14.1 percent in February. The bank attributed the rise to higher prices for food and fuels, as well as higher costs for medicines and other healthcare items. These higher prices are consistent with the bank’s assessment that construction costs will rise by about 15 percent over the next year, due to ongoing political unrest.

How did Egypt’s inflation rate spike in March?
In March, following the CBE’s decision to hiking the key interest rate by 25 basis points, the Egyptian pound declined by about 8 percent against the dollar, or by about 36 percent against the euro. This translated into higher inflation in Egypt and higher costs for the average Egyptian. Food and fuel prices rose by about 15 percent and 20 percent, respectively, and other items such as medical services and household supplies increased by about 10 percent.

What is the long-term outlook for Egypt’s inflation rate?
In its most recent projections, the Egyptian Institute of Statistics (EIAS) projects that the inflation rate in Egypt will drop back to about 10 percent in 2022, from a recent high of about 15.6 percent in 2016. The source of this projection is the government’s Medium-Term Expenditure Framework, which was approved by parliament in March 2017. This forecast is in line with the CBE’s forecasts, as it expects inflation to fall back to about 10 percent in 2022.

What are the implications of the Egyptian inflation rate spike?
Any drop in the price of commodities like oil, cotton, and natural gas can help reduce inflation in Egypt. The same is not true of services, where higher costs of living are felt by the average Egyptian. The drop in the pound has hurt the Egyptian’s economy, and inflation has gone up as a result. The drop in the pound has not helped, and the Central Bank has to date failed to implement a coherent strategy to reduce the soaring inflation. The government has also stressed that it will not allow inflation to exceed 15 percent.

 
 

What has been the current strategy of the Egyptian Central Bank to reduce the soaring inflation?
The Egyptian Central Bank has built a reputation as a low-inflation lender of last resort, but it has also begun to implement a more complex strategy. The first step was to slash the interest rate it pays on loans from banks by 50 basis points. This helped the Egyptian pound appreciate by about 10 percent. The bank also lowered the amount deposited by Egyptian banks, which reduced their interest income, which caused the Egyptian pound to lose about a quarter of its value. The bank’s new strategy is to push interest rates back up and try to improve the exchange rate. It also hopes to increase spending on infrastructure, which it says will improve the country’s competitiveness and help reduce inflation.

Final Words
Egyptian inflation rose to 15.9 percent in March, up from 14.1 percent in February, according to Central Bank estimates. The price increases were driven by higher food and fuel costs, as well as higher costs for medicines and other healthcare items. The increased inflation has added to an already high price of living in the country. The lack of an efficient customs and taxation system and high inflation have made Egypt a difficult place to do business for foreign investors.

More concerning is the fact that the country’s inflation rate has remained relatively stable for the last year and a half, even as the country’s economic growth rate plummeted to 1.2 percent in Q3 2016. With inflation forecasted to remain high through the end of 2017, it will be difficult for the government to implement programs that will help the average Egyptian.

That said, Egypt is far from a cash-only economy, and its cash-based fiat currency, the Egyptian pound, is under very strict control. The Egyptian Central Bank has been hiking interest rates to support the currency, which has helped bring down inflation. The bank has also been conducting pilot programs to increase the use of digital currencies and has begun to accept bitcoin. The government has stressed that it will not allow inflation to exceed 15 percent.

Regardless of the country’s economic situation, it is important for investors to understand where the currency is going and why it is going there. As with most emerging market countries, the Egyptian pound will probably remain volatile. Therefore, investors need to watch the situation closely, as well as the Central Bank’s actions, to spot emerging trends and patterns that could affect investment decisions.

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