Egypt Inflation Soars as Higher Food Costs Add to Currency Angst

Egyptian inflation soared to a fresh record, with consumer costs now increasingly at the mercy of whether authorities will allow the pound to weaken again.

Price growth in urban parts of the country accelerated to an annual 37.4% in August from 36.5% the previous month, according to figures released Sunday by the state-run CAPMAS statistics agency. On a monthly basis, inflation was 1.6%, compared with 1.9% in July.

A 71.4% increase in the cost of food and beverages, the largest single component of the inflation basket, was a major contributor to last month’s price pickup.

Inflation has been above 30% for much of this year, a challenge for policymakers in the North African nation that’s under pressure to allow more flexibility in the exchange rate to unlock the next tranche of the International Monetary Fund’s $3 billion loan.

The IMF delayed the first review of Egypt’s rescue program that was expected to be completed in March as it waits for authorities to make good on reforms. Authorities need to build up sufficient foreign-exchange buffers to manage another likely depreciation.

Three devaluations since early 2022 have already fed through to the economy by raising the cost of imported goods in a country that was also experiencing shortages of foreign exchange. Though Egypt’s currency has been kept stable for months, businesses and households have to pay more to source dollars on the local black market.

President Abdel-Fattah El-Sisi warned in June about the impact of currency devaluations on rising prices, saying the nation of over 100 million won’t be able to tolerate much more weakening of the pound.

The central bank unexpectedly hiked interest rates by 100 basis points last month, a surprise because the governor previously signaled tighter policy could do little to contain price growth he said stemmed from supply issues. Egypt’s official borrowing costs are still among the world’s most deeply negative when adjusted for inflation.

What Bloomberg Economics Says…

“Egypt’s interest rates are too low to attract foreign capital, despite a surprise hike in August. Global yields provide competing returns at a lower risk. High inflation has pushed Egypt real rates to be among the lowest in emerging markets. And the risk of devaluation could wipe out interest-rate gains.”

— Ziad Daoud, chief emerging markets economist. For more click here.

The central bank sees consumer price increases peaking in the second half of 2023 before “beginning a disinflation path” toward its goals. It targets inflation at an average of 7%, plus or minus 2 percentage points, by the fourth quarter of 2024 and 5%, plus or minus 2 percentage points, on average by the final three months of 2026. The Monetary Policy Committee next plans to meet on Sept. 21.

Goldman Sachs Group Inc. expects inflation to stay above 30% this year and then go into “a sharp decline through 2024.”The main risk to our projections remains the possibility of further FX weakness,” Goldman economist Farouk Soussa said in an August report. “We do not expect any depreciation of the pound in the official market” but “FX pass-through from the parallel rate remains a risk factor.”

Source from: Bloomberg