Egypt’s monthly headline inflation hit a new record in September, rising by 2% to over 40%, according to the latest figures published by the state-owned Central Agency for Public Mobilization and Statistics (CAPMAS).
Yet, compared to the level seen in August, the country’s annual headline inflation slowed in September to 38%, down from 39.7% recorded in August.
“While CAPMAS figures suggest a slowdown in inflation, we remain cautious about proclaiming that the inflationary surge has truly subsided, for several reasons. Inflation is still primarily driven by rising food prices,” Ali Metwally, director of Economic Intelligence at ITI Consulting, told Business Monthly.
Metwally also expressed that despite the recent government initiatives to reduce prices of essential commodities, significant pressure on the country’s overall inflation will persist. “While the government’s agreement with producers and retailers to lower prices is a positive move, it is crucial to closely monitor its implementation and the government’s capability to enforce penalties on any violators of the agreement,” Metwally emphasized.
Meanwhile, the calculations published by the Central Bank of Egypt (CBE) indicated that Egypt’s annual core inflation rate declined in September to 39.7%, down from 40.4% posted in August.
The published figures are still well below the target the CBE set at 7% (±2%) through in the fourth quarter of 2024. Also, the CBE has a commitment to the International Monetary Fund (IMF) to bring down inflation to the 7% level through 2026.
This comes under the $3 billion four-year loan deal the Fund approved for the country in December 2022.
As the CBE’s Monetary Policy Committee has only two meetings to hold through the end of December 2023, the latest inflation readings could push the CBE to introduce additional increases to the key interest rates.
Since March 2022, when the Russian-Ukrainian war erupted, the CBE hiked key interest rates by a total of 11%(1100 bps), 3% of which was introduced in 2023.
In the same context, Egypt has depreciated its local currency three times in the last 18 months, which contributed to rising inflation in the country.
Prime Minister Mostafa Madbouly announced this week that the government will suspend duties and customs on several goods for six months, in an effort to contain the elevating inflation. The government also reached a deal with local merchants to lower the prices of seven basic commodities by up to 25% beginning 15 October.
As the EGP devaluation has been playing a role in feeding the country’s soaring inflation, Metwally told Business Monthly that a further local currency depreciation would imply risks fueled by the disparity between the unofficial black market exchange rate and the official rate, which exerts considerable pressure on inflation.
The US dollar is traded for around EGP 31/ 1 USD in the official market in Egypt, it is traded for over EGP 43/ 1 USD in the currency parallel market.
“Importers of commodities are likely to pass on most, if not all, of their additional costs to the end consumer. While resolving this disparity, whether through a devaluation or a permanent shift to a flexible exchange rate regime, would ultimately benefit traders and the overall economy in the long run, it will exacerbate short-term inflationary pressures. Additionally, it could result in substantial harm to critical economic indicators such as national debt, fiscal deficit, living costs, poverty rates, and overall economic stability,” Metwally explained.
Nonetheless, according to Metwally, if this disparity persists, it is probable that inflationary pressures will persist through 2024, with the average inflation rate projected to range from 19% to 21% year-on-year, compared to the 33.8% recorded in 2023.
“It appears unlikely that the CBE will achieve its inflation target before at least H1 2025. This supports my view that we are likely to see further rate hikes at least in Q4 2023/Q1 2024,” he added.