Dubai’s Arqaam Capital forecasts soaring Egypt inflation to continue

The government's decision two months ago to free its exchange rate and raise fuel prices has spurred an increase in the cost of living for ordinary Egyptians.

A trader waits for customers at a market in Abbdien square in Cairo, Egypt. The cost of food has surged by 28 per cent. Amr Abdallah Dalsh / Reuters

Egypt’s urban consumer prices rose the fastest in at least six years in December, fuelled in part by a 28.3 per cent increase in food costs following the central bank’s decision to abandon currency controls two months ago.

Annual urban inflation accelerated to 23.3 per cent in December, while the monthly rate quickened to 3.1 per cent, according to the state-run statistics agency, Capmas. The monthly rate decelerated from 4.8 per cent in November.

High annual headline inflation is expected to continue for several years before dropping to single-digit levels by the end of 2019 or early 2020, Reham ElDesoki, a senior economist with Dubai-based Arqaam Capital, said in a research note.

“Egypt now is in the eye of the policy restructuring cycle, and the price is higher inflation and an overall fiscal deficit pending a structural change in government spending and general repricing of goods and services,” she said. “A reversal of over 50 years of comprehensive government support will take time and is a welcome change to put Egypt on a more sustainable path to growth and fiscal consolidation.”

The annual rate was the highest since Bloomberg started tracking the data in 2010. The government said the November 3 decision to free the exchange rate and raise fuel prices was imperative to revive the economy but it was also expected to boost inflation. Economists had forecast annual consumer prices would rise more than 20 per cent by the end of 2016.

The reforms, which helped the nation finalise a US$12 billion IMF loan, have created new hardships in the country of 92 million people, about half of whom live near or below the poverty line. The pound has lost more than half its value in a slide that officials have said is temporary and to be expected until a market equilibrium is achieved.

The flotation has allowed the banks to again step in and make hard currency available, in effect ending a dearth of dollars that had crippled business activity, officials have said.

The central bank is expected to release core inflation data, which exclude volatile items, later Tuesday.

Update:

Egypt’s annual core inflation jumped to 25.8 per cent in December from 20.7 per cent in November, the central bank said on Tuesday.

* Bloomberg

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