Earlier this week, data from the Central Agency for Public Mobilization and Statistics in Egypt showed that annual consumer price inflation in Egyptian cities accelerated to 32.7% in May, against 30.6% in April. On a monthly basis, urban inflation rose to 2.7% from 1.7% in April.
Annual inflation approached the record level recorded in July 2017 at 32.952%.
According to central bank data, Egypt’s annual “core inflation” rate reached 40.3% in May from 38.6% in April. The Core Consumer Price Index, compiled by the Central Bank of Egypt, recorded a monthly rate of 2.9% in May 2023, compared to a monthly rate of 1.6% in the same month of the year previous year, and a monthly rate of 1.7% in May 2023. April 2023.
Will recent inflation data lead the Egyptian Central Bank to raise the interest rate after setting it twice in the current year, including once when it raised the interest rate principal by 200 basis points last March?
Price increase
Banking expert, Dr. Sahar El-Damati, in exclusive statements to “Economy Sky News Arabia”, said that high inflation rates in this way are due to a number of fundamental factors, to which adds the increase in diesel prices, in addition to the increases in the group of vegetables, fruits and nutritional materials.
As the inflation rate nears its all-time high, Eldamaty talks about central bank guidance accordingly, either in terms of “fixing interest rates” or “raising interest by 50 basis points” due to high inflation rates.
Inflation has recorded sharp increases over the past year after a series of pound devaluations that began in March 2022, as well as a prolonged shortage of foreign currency and delays in the liberalization of imports.
However, the banking expert believes that the increase in interest rates may not bring the desired results against the background of the fight against inflation. Considering that the increase in financing costs leads the trader and the producer to pass this increase on to the consumer, thus entering a vicious circle, and that the increase in costs for the producers also leads to an economic slowdown, in addition to the increase in interest affecting the public budget deficit.
According to her, a “calm period” is needed to assess the current situation (referring to the setting of interest rates), especially since the Central Bank of Egypt has taken important measures, including the cessation of currency devaluation – as predicted before – until there is abundance. In foreign currencies through which it can impose an equilibrium rate.
Citigroup expects Egypt not to resort to local currency devaluation until at least next September, with support from expected tourism receipts and sales of government assets, and the impact of this on easing the pressure on the Egyptian economy.
However, Egyptian President Abdel Fattah El-Sissi hinted that the currency is unlikely to be devalued again anytime soon, in his statements at a youth conference on Wednesday, and said such measure would harm national security and citizens.
The Monetary Policy Committee of the Central Bank of Egypt has held three meetings so far since the beginning of the year 2023. In the first meeting, it violated expectations and approved the fixing of the interest rate, while at its second meeting, before the end of last year in March, it did not violate the expectations of financial institutions and investment banks, and approved raising major interest rates by 200 basis points. While the decision to fix the interest rate was taken at the meeting last May.
The Monetary Policy Committee of the Central Bank of Egypt, in its last meeting, kept deposit and loan yield rates overnight and the price of the Central Bank’s main operation unchanged at 18.25%. , 19.25% and 18.75%, respectively, and the credit and discount rates were set at 18.75%.
specific options
For his part, Hanan Ramses, a financial market expert, points out in statements to “Sky News Arabia Economy” that raising inflation rates in this way would put pressure on the central bank to raise the rate again. rate, after it was set at the last meeting, noting Until the rate hike can reach 100 basis points.
And it indicates that the Central Bank has exhausted the other options available, on the one hand it cannot increase the reserve requirement with the banks to more than 18% because that would lead to a reduction in liquidity in the banks, and it cannot also cannot reduce the exchange rate of the pound against the dollar now, in particular This would lead to a constant rise in prices, leading to a vicious circle of high inflation rates.
And Ramses added: “The Central Bank may tend to allow banks to issue savings certificates with a higher interest rate (…) and there are proposals to offer certificates in dollars to a rate of 10% for a period of three years to Egyptians residing abroad and dual nationals.
Financial market expert says alternative options other than interest rate hikes are ‘more painful’ and can lead to blowout of economic conditions, including an increase in budget deficit if the pound depreciates , emphasizing at the same time that alternative solutions to increase the currencies, including increasing exports Cutting expenses and reducing the import bill are not an urgent solution, while there are obligations to be fulfilled before the end of this month of June, concerning the payment of 8.32 billion dollars until the end of the month (according to the repayment schedule for the medium and long-term external debt).
Egypt remains short of foreign exchange despite the pound falling about 50% since March and signing a new $3 billion bailout with the International Monetary Fund in December.
Fitch Ratings downgraded Egypt’s rating from “B+” to “B” by one notch, while adjusting the outlook to negative. In a press release, the agency mentions the difficulties of external financing with regard to the country’s financing needs, and the tightening of external financing conditions. However, Egypt’s Finance Minister, Dr Mohamed Maait, affirmed his country’s ability to “exit the current crisis”, in support of current indicators at the international level, which are linked to low inflation rates. as well as falling food prices. At the end of April, the rating agency “Standard & Poor’s” announced that it had reconsidered its estimates of the degree of outlook for Egyptian debt from “stable” to “negative” because of the “significant external financing needs” that it anticipates in terms of public debt. finance.
dollarization phenomenon
In the context, economist Dr. Hossam Al-Ghayesh, in statements exclusive to the site “Sky News Arabia Economy”, indicates the continuation of the phenomenon of dollarization through the hoarding of foreign currencies, which exacerbates the crisis of currency availability in Egypt, and therefore it is likely that the Egyptian Central Bank will turn – and in the face of high inflation rates as such – to raising interest rates to a rate 200 basis points higher for counter this phenomenon.
He points to the current gap between the official exchange rate in banks and the price in the parallel market, as well as the price of futures contracts, all of which are factors that are pushing the Central Bank to raise interest rates during the next meeting.
The economist did not rule out the possibility that the Central Bank might resort to devaluing the currency, but he says the issue is related to the extent of progress made in the deals related to the government bid program.
At the same time, he also suggests the possibility of issuing new savings certificates with higher interest in order to withdraw liquidity from the markets to those who are not part of the banking system, pointing out that generally, when the interest is increased, there are new financial products, including investment high-yield certificates.
Positive indicators
On the other hand, the official data announced by the Egyptian Ministry of Finance earlier, for the first quarter of this year 2023, shows a set of positive indicators, as follows:
98% increase in foreign direct investment inflows. 35% growth in Suez Canal revenues (as one of the main sources of foreign exchange) in the first quarter (2.3 billion dollars). While indicators for the fiscal year ending June 2022 show relatively positive results, despite large-scale external challenges. Among these indicators is the transformation of the primary budget deficit (which lasted more than 21 years) into a primary surplus of 1.3%.
And Egypt’s finance minister said in a statement last April that the indicators for the first seven months of the current fiscal year in the general budget were positive, and the budget showed a primary surplus of about 33.7 billion pounds, compared to 15.2 billion pounds for the same period of the previous financial year, in addition to increasing tax revenues to approximately 18.9% thanks to the development and digitization works which have made it possible to expand the tax base, to define more precisely the tax community and to do justice between competitors.
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