EFG Hermes expects Egypt's inflation to hit new highs after IMF loan deal

Surging inflation coincides with curbs on foreign currency withdrawals from Egyptian pound accounts

A fruit and vegetable street vendor at work on the outskirts of Giza in the Greater Cairo area. Reuters

Egypt’s double-digit inflation will likely hit new highs when the Arab world’s most populous nation concludes a new loan deal with the International Monetary Fund, EFG Hermes, Egypt's biggest investment bank, has said.

The forecast followed the announcement on Monday by Egypt’s state statistics agency, Capmas, that year-on-year inflation rose in September to 15 per cent, its highest in nearly four years. Inflation stood at 14.6 per cent the previous month.

“We expect inflation to experience a second wave in the coming weeks once Egypt finalises its agreement with the IMF, given an expected adjustment in the EGP [Egyptian pound],” EFG Hermes said.

“Our base case projects inflation accelerating to 18-19 per cent with a weaker EGP reflecting on food and fuel prices."

Talks are intensifying about Egypt and the IMF being on the brink of a loan agreement for up to $8 billion as part of an economic restructuring plan. A cornerstone of that plan is likely to be a more flexible foreign exchange mechanism.

Separately, banks have issued new regulations to curb foreign currency withdrawals from Egyptian pound accounts, a move that underlines the country’s foreign currency crunch after a steeply higher import bill and the en masse withdrawal of billions of dollars ― more than $20 billion by some accounts ― from Egypt’s once-lucrative debt market.

Egypt has been hit hard by the fallout from the Russia-Ukraine war, forcing the government to respond with a series of austerity measures as well as additional spending to shield the poor among its 104 million people against higher food prices.

The latest rise in inflation was caused mainly by higher tobacco and food prices, Capmas said.

Egypt devalued its currency by 14 per cent in March but has since allowed the pound to slide even more against the US dollar. It was trading this week at about 19.63 to the greenback, about 20 per cent down since the eve of the March devaluation.

Economists expect the pound to continue nosediving in the coming months, hitting 22-23 pounds to the dollar by the end of the year or early in 2023.

The foreign currency crunch, meanwhile, has dealt a blow to local manufacturers and crop growers who have for months been unable to secure foreign-made components for their products.

In the most telling manifestation of the crunch, authorities have dimmed the lights across much of Cairo, including in Tahrir Square, to make more natural gas available for export to Europe and attract more foreign currency.

Although tourist numbers are back to healthy levels after the slump caused by the coronavirus pandemic, Egypt is still feeling the pinch from the loss of Russian and Ukrainian tourists, who normally account for 30 per cent of its foreign visitors.

In a highly unusual occurrence, advertisements offering factories for sale have been popping up on social media networks in recent weeks. The authenticity of the adverts could not be independently verified, but industrialists have been speaking of the financial woes they endure as a result of the curbs on non-essential imports.

President Abdel Fattah El Sisi, architect of an ambitious drive to modernise the economy, has publicly instructed his government to clear a massive backlog of imports stranded at ports across the country, with banks required to come up with the value of the goods in foreign currency so they can be released.

However, pro-government commentators say foreign currency would be made available to importers according to a priorities system and that importers would not have their full requirements met.

Significantly, the curbs on foreign currency withdrawals from accounts in Egyptian pounds were ordered by commercial banks and not the central bank as is customary.

The restrictions have been challenged as illegal by prominent legislator Mahmoud Qassem, who has requested that Prime Minister Mustafa Madbouly address parliament’s lower chamber on the issue.