Egypt Inflation Rate Eases Ahead of Expected Devaluation

EghtesadOnline: Egypt’s annual inflation rate dropped for the first time since March, providing a rare respite from soaring prices as officials prepare a devaluation to secure a $12 billion loan from the International Monetary Fund.

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10 October 2016

Prices in urban areas rose 14.1 percent in September compared to a year earlier, according to the state-run statistics agency CAPMAS. The rate was 15.5 percent in August, the highest in at least seven years. Food and beverage prices -- the largest component in the basket of goods and services -- climbed 14.8 percent, down from 19.3 in August. Month-on-month inflation was 1.2 percent in September, compared with 1.9 percent in August, reports Bloomberg.

The easing is likely to be temporary as the government implements measures it committed to with the IMF to trim one of the Middle East’s highest deficits, including devaluing the Egyptian pound and reducing subsidies. Some economists predict the inflation rate will reach 20 percent by the end of the year. A weaker currency is viewed as essential to end a foreign-currency shortage that has hammered business activity and kept foreign investors away.

"We expect inflation to rise again soon," Jason Tuvey, Middle East economist at London-based Capital Economics, said in an e-mailed statement. The devaluation will push up the prices of imported goods, while further subsidy cuts could add an additional 2 percent to headline inflation, he said.

The government is concerned that the measures will further squeeze already struggling lower income households, particularly after the introduction of a value-added tax last month. It has urged food companies to cut prices to ease the potential shock to consumers, while President Abdel-Fattah El-Sisi ordered his administration to ensure staples remain available and to guard against price-gouging by traders.

Egyptian officials have said they are close to meeting an IMF condition that it obtain several billion dollars of financing from other sources before the loan deal goes ahead, though fund chief Christine Lagarde said on Saturday that Egypt still needs to take action on its currency and subsidies before the lender’s board considers the request.