Is Egypt On The Road To Hyperinflation?

June 25, 2023


The last time inflation was higher than it is right now in Egypt, Amr Diab had just released the third of his 36 studio albums. In June 1986, CAPMAS reported urban inflation had reached 35.1%. In April, the Central Bank (CBE) said annual urban inflation was 30.6%, and annual core inflation, which includes basic foodstuffs and other essentials, hovered around 38.6% for the second consecutive month.

For consumers, prices of imported goods have soared beyond those official figures, primarily because the pound lost half its value (from EGP 16 to nearly EGP 31) against the dollar from January 2022 until press time. “Based on purchasing power parity and factoring in black market exchange rates … Egypt’s real inflation rate [is] 101%,” Johns Hopkins University economist Steve Hanke told France24 in January.

And inflation could increase further, as many investors believe the Egyptian pound is still overvalued. In March, Reuters reported that the pound’s non-deliverable forward contracts, which reflect investors’ predictions of foreign exchange rates, crossed EGP 40 to the dollar. By contrast, the CBE’s official exchange rate still hovers between EGP 30 and EGP 31.

If that trend continues, Egypt could be heading toward hyperinflation, which Investopedia defines as “rapid, excessive and out-of-control general price increases in an economy … Hyperinflation is an extreme case of inflation, not just a high inflation rate.”

Hyperinflation roadmap

Throughout history, hyperinflation scenarios haven’t happened often, though there is disagreement over how many times it has occurred. Investopedia says it has happened 43 times in 28 countries since 1796. Hanke documented 57 occurrences from 1796 to 2018.

Cullen Roche, author of “Pragmatic Capitalism,” told Oracle Netsuite business development blog in December that “hyperinflations have generally occurred in nations with rampant corruption, war, regime change, a ceding of monetary sovereignty, output collapse or other extreme exogenous factors.”

The effect of hyperinflation on economies is profound. Kimberly Amadeo, former president of WorldMoneyWatch, a think tank, says it starts with hoarding durable goods, such as automobiles and washing machines. If prices continue to climb at the same uncontrollable rate, people will hoard perishable goods, like bread and milk. “These daily supplies become scarce and more expensive, and the economy falls apart,” she wrote in The Balance in July 2022. “People lose their savings as cash loses its value … Soon, banks and lenders go bankrupt because their loans lose value. They run out of cash as people stop making deposits.”

One of the top causes of hyperinflation is governments printing more money. Real Vision, an economic research firm, says excess supply is usually the easy way for governments to get out of a recession — defined as two consecutive quarters where GDP contracts. Printing “helps consumers and businesses access capital, [which] can increase spending and spur economic growth,” noted Real Vision’s May 2022 blog. However, “printing more money reduces the value of the currency, which can lead to … hyperinflation.”

Another cause of hyperinflation is “demand-pull” inflation. Investopedia explains it as a “scenario in which … there are not enough goods and services available to meet the increase in overall demand from consumers and businesses.” That happens when “circumstances and poor monetary decision-making [come] together.”

Oracle Netsuite also points to “deficit monetization” as a driver of hyperinflation. It is when the government’s bond issuances to “reduce [the] budget deficit are purchased by the country’s central bank.” Peter Bernholz, author of “Monetary Regimes and Inflation,” said 30 of the 43 reported hyperinflation cases were caused by public deficits financed by money creation.

In 2023, hyperinflation is more likely than ever, fueled by global events that started with lockdowns to curb the COVID-19 virus, which resulted in global supply chain bottlenecks a year later. Last year, the war in Ukraine hurt supply further.

The result is nearly 25% higher oil prices since the start of 2022, according to Trading Economics, a data curation portal. IndexMundi, another data aggregator, said food commodity prices are 42.5% higher during the same time frame.

Another major factor contributing to hyperinflation is how governments manage their economies, particularly during troubled times. “Consumers and businesses may … lose faith in the country’s economy or the government’s ability to regulate the flow of currency during times of crisis, such as war, a global health crisis, or a natural disaster,” said Real Vision.

Compounding the lack of confidence in governments is a perception by consumers and businesses that the state’s policies are increasing the cost of living and reducing disposable income. Real Vision says this skepticism would exacerbate the “sense that the government doesn’t have the public’s best interest at heart.”

A July report from Accenture said fast-rising prices could become a permanent feature of the global economy. “We have entered a high inflation environment that is fundamentally challenging business leaders and the way companies operate,” the report said. “New dilemmas emerge every day.”

Coming to Egypt?

Egypt is not in an enviable position as international confidence in the pound wanes. Throughout the pandemic in 2020 and 2021, none of the top three sovereign rating agencies (Standard & Poor’s, Moody’s, and Fitch) changed Egypt’s credit rating or outlook.

In May 2022, three months after Russia invaded Ukraine, Moody’s changed its outlook from “stable” to “negative.” In November, Fitch followed suit.

In February, Moody’s dropped Egypt one grade, from “B2” to “B3,” but returned to the country’s “stable” outlook status. By April, S&P changed its outlook for Egypt from “stable” to “negative,” a sign that it will likely decrease Egypt’s credit rating if the economic situation deteriorates further.

In the latest sovereign rating report, S&P justified its decision by saying, “The negative outlook reflects risks that the policy measures implemented by Egyptian authorities may be insufficient to stabilize the exchange rate and attract foreign currency inflows to meet the Sovereign Fund’s high external financing needs.”

If the government fails to reverse that sentiment, inflation will likely continue to increase, bringing the country one step closer to hyperinflation. In March, Fitch forecast that “Egyptian inflation will average 34.3% in 2023 against our previous forecast of 25.9%.”

Fitch noted that price increases would be “most pronounced in the food [and] non-alcoholic beverages component, which represents 32.7% of the consumer price index basket.”