ABU DHABI // Egypt's decision to raise interest rates for a fifth time this year may silence critics who say the central bank has been slow in fighting inflation that has climbed to more than 20 per cent. But raising rates also risks worsening the impact of what some economists warn is a looming global economic slowdown. The Central Bank of Egypt's monetary policy committee raised its overnight deposit rate last Thursday by half a percentage point to 11 per cent, and lifted its discount rate by a full point to 11 per cent.
"Today's decision is aimed at containing inflation expectations," the bank said. "The MPC remains concerned about possible propagation of food inflation to non-food inflation." The bank suggested that more rate increases may be in store if inflation failed to ease. The global food price crisis has hit Egypt particularly hard, sparking food riots earlier this year. While the latest move brings the total rate increase this to more than 2.25 per cent, economists said the increases were too little and too late. Government policies aimed at easing the impact of inflation, moreover, have paradoxically made matters worse, they said.
Egypt's inflation dilemma puts it among a host of developing countries - including those in the Gulf - that are grappling with how to cope with runaway commodity prices while adhering to monetary policies that keep their currencies artificially low. After failing to respond to inflation with adequate rate increases, many are belatedly raising interest rates even as economists warn that their economies are in the path of the slowdown spreading outward from the US.
"Evidence of decelerating demand in emerging markets is rising," said Donald Hanna, the head of emerging markets research at Citigroup in New York. Slowing demand for commodities from developed economies, combined with a retreat by foreign investors from emerging markets in response to a worsening credit crunch, is punishing markets that some analysts thought would be inured to the US financial crisis.
Now, economists say emerging markets are likely to be swept up in the global slowdown. "While the world will technically avoid a global recession," said the US economist, Nouriel Roubini, in a weblog comment last week, "it will get quite close to it by mid 2009, as global growth will slow down to a near recessionary three per cent." Like many Asian exporters, Egypt has been keeping its currency, the pound, artificially depressed against the US dollar to help keep its exports competitive on international markets.
Instead of raising interest rates more quickly and pushing its currency up, therefore, Egypt responded to inflation by reducing customs duties on food imports and expanding access to food subsidies, which are now available to 71 per cent of the country's population. It then raised public sector wages by 30 per cent to offset the impact of inflation, and financed the increase by raising domestic fuel prices and lifting taxes and fees.
All of these measures, economists point out, actually help to accelerate inflation. Slower growth, they say, is likely to hurt government efforts to rein in a budget deficit still at seven per cent of GDP. Efforts to reform trade and tax regimes have attracted capital inflows, another source of inflationary pressure that higher rates will tend to exacerbate, economists say. warnold@thenational.ae