How inflation and high interest rates have reshaped consumer spending in Mena

Consumers in the region have become more price-sensitive and shifted expenditure towards essential items

Egyptian Kenzy Samir, left, and Lebanese Houri Elmayan have prioritised spending only on essentials because of high inflation in their respective countries. Photo: Kenzy Samir / Houri Elmayan

Persistent inflation and high interest rates have significantly affected the spending decisions of Kenzy Samir’s family in Egypt. For instance, they have deferred plans to newly furnish their house and also put on hold property investments.

The Dubai-based Egyptian, who works as a content creator with a real estate broker, believes this applies across wider purchasing behaviour in Egypt.

“With rising costs of goods and services, we as Egyptians have become more cautious and selective with our expenses, mainly by prioritising the basics and essential items, having reduced discretionary spending on non-essential items, dining out, luxury purchases and hotel visits,” she says.

“For instance, before inflation, we planned to fully furnish our new house. However, due to the current economic conditions and an 80 per cent increase in the cost of living, we've decided to postpone these plans until the economy stabilises."

Ms Samir says her father previously invested in real estate in Egypt but now her family prioritises spending only on essentials due to inflation. She believes investing in Dubai property is currently a better opportunity than in Egypt.

The Central Bank of Egypt increased interest rates in March and allowed the national currency to float freely, with no interventions from the state. After the interest rate increase, the central bank’s overnight lending rate stands at 28.25 per cent while the overnight deposit rate is 28.25 per cent.

The central bank said the rate increase was aimed at lowering inflation, which hit a record high of 38 per cent towards the end of last year but has since eased to about 35 per cent.

Rates will remain unchanged until the desired inflation goals are achieved, the regulator said.

Spending priorities change

Ms Samir says lower interest rates would influence her spending habits positively.

“Lower interest rates could lead to reduced borrowing costs, so I would likely consider larger purchases or investments that were previously put on hold due to financial considerations, such as furnishing our house or reinvesting in real estate again,” she adds.

Inflation has also affected her parents, who are living in Dubai, and eroded the value of their savings.

"Previously, the exchange rate between the UAE and Egypt was not as significant," she says. "However, now with Dh1 equating to about 10 Egyptian pounds, their savings’ value has diminished, making it less valuable and more expensive to spend" in Egypt.

The Egyptian family is currently exploring home-buying options in Dubai due to lower interest rates and higher returns here.

Her experience is broadly reflective of the situation across the region, as high inflation and interest rates alter people's purchasing patterns.

Consumers in the region have become more price-sensitive and have shifted their spending towards essential items while cutting back on other expenses, says Vijay Valecha, chief investment officer at Dubai-based Century Financial.

This trend has been observed since the aftermath of the Covid-19 pandemic, he says.

“Among the Middle Eastern countries, Egypt is facing a more acute problem due to its larger population and less diversified economy compared with the GCC countries."

Inflation in Egypt has been particularly high, with annual urban consumer price inflation surging to 35.7 per cent in February from 29.8 per cent in January, primarily driven by rising food and beverage prices.

The average inflation rate in the Middle East and North Africa region stood at 5.4 per cent in 2023, exceeding the 2022 average of 2.5 per cent, Mr Valecha adds.

The trend of rising inflation began in late 2021 and intensified throughout 2023.

Many countries have increased interest rates to try to tackle rising inflation. Higher interest rates make it more expensive for people and companies to borrow money from banks. This should reduce spending and consumer demand, which in turn will often lead to a drop in inflation, according to a 2022 report by the World Economic Forum.

As rising inflation fuels the cost-of-living crisis, policymakers worldwide are worried about rising household debt globally and the ability of consumers to pay back their debts, the lender said.

Regionally, one of the countries battling soaring inflation is Lebanon.

The country's inflation rate, which has been in triple digits since 2021, accelerated to 221.3 per cent last year, from 171.21 per cent in 2022, according to the Central Administration of Statistics.

The acceleration of inflation is being driven primarily by the depreciation in the exchange rate, the rapid dollarisation of economic transactions and, in particular, the components of the CPI basket, the World Bank said.

The soaring costs come as Lebanon grapples with what the World Bank has called one of the worst global financial crises since the middle of the 19th century.

Its economy last posted expansion in 2017 when GDP rose 0.9 per cent. It had its worst showing in 2020 – during the Covid-19 pandemic – when the economy dropped by an estimated 21.4 per cent, according to World Bank data.

Lebanon is struggling with a highly polarised political landscape, a presidential vacuum, a caretaker government with restricted executive powers, an interim central bank governor and limited legislative action by Parliament.

It has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors, due to a lack of consensus among the political ruling class.

“The main issue in Lebanon, more than interest rates, is inflation and the instability of the currency,” says Houri Elmayan, a Lebanese public relations strategist and consultant.

In less than three years, the currency has fallen extraordinarily from a rate of 1,500 Lebanese pounds to a US dollar, to 89,000 pounds now, she says.

“This is due to the banking crisis where no loans or credit card systems work any more and people do not have access to money in their accounts. Most people live on remits and day-to-day earnings.”

Cash payments only

Ms Elmayan says this has affected her ability to buy a vehicle because she cannot get a car loan. She must be able to pay the full price for it in cash.

It also prevents her from doing home renovations because everything has to be paid in advance as the contractors need to pay their suppliers in cash before any work begins.

“Given the erosion of the banking system, the need for liquid cash is the only way to survive in this market. That puts a great burden on people who wish to get a mortgage or make larger purchases. These things were a bit easier in the past,” she explains.

Ms Elmayan tries to saves money by cutting back on expenses such as dining out. Her family goes out on special occasions but prefer hosting at home versus spending in a restaurant.

“We have also been limiting our travel and go only to destinations where we have a home, friend or relative to stay with to reduce hotel costs as those can take up quite a big chunk of the travel budget. We are also looking into staycations or day-trips to minimise travel costs,” she says.

Other cost-saving strategies include organising a potluck for family lunches and dinners, shopping at local grocery shops to save on fuel, carpooling, having a weekly meal plan and shopping only for that per week.

Similarly, Saidah Aboudi, a Jordanian chief commercial officer, has turned more cautious with her spending due to high inflation and interest rates.

She prioritises essential spending and defers non-urgent expenses.

“We’ve cut down on purchasing clothing, travelling, dining out and entertainment. We try to budget more, look for sales and discounts, and try to shop at different stores that might have better prices,” Ms Aboudi says.

She adds that there are concerns about her savings losing value in terms of purchasing power.

Will spending bounce back if rates drop?

If interest rates were to decline, it is expected to have an impact on consumer spending habits but a spending boom is unlikely, Mr Valecha points out.

Lower interest rates would make it more affordable for consumers to borrow money for various purchases, such as cars, appliances or home renovations.

This could incentivise some consumers, especially those with good credit scores and stable income, to make purchases they might have previously deferred, he suggests.

However, consumer confidence may remain shaken due to high inflation and previous high interest rates, which could make some people cautious about taking on additional debt, even with cheaper borrowing options, he says.

“Additionally, existing debt accumulated during periods of higher interest rates might still require significant repayment, limiting disposable income available for increased spending,” Mr Valecha says.

Many consumers may also prioritise rebuilding their savings buffers, which have likely been depleted by inflation. They might focus on replenishing these savings before significantly increasing discretionary spending, he adds.

The impact of lower interest rates on consumer spending habits could also vary by country.

Egypt, facing a more severe economic situation, might register a smaller increase in consumer spending due to factors such as a larger population with lower overall income and potentially higher future interest rates, he says.

On the other hand, countries such as Saudi Arabia and the UAE, with more stable economies and potentially lower interest rate reductions, might experience a more pronounced rise compared to others.

The UAE’s GDP is projected to grow by 4.2 per cent this year and Saudi Arabia by 3.8 per cent. They also have low inflation and healthy government finances, Mr Valecha says.

Being pegged to the US dollar, they also tend to change their interest rates based on moves by the US Federal Reserve. This is unlikely to have any divergence, he says.

These factors could contribute to a low interest rate environment in the near future for these countries.

Increase income, reduce expenses

With lower interest rates, the additional income could lead to a restoration of some discretionary spending that has been curtailed in the current climate, says Abhinav Mittal, an Indian resident in the UAE.

“It would allow some breathing room in household budgets and maybe even the chance to finally take that family vacation and dinner at a Michelin star restaurant that we've been putting off. A drop in interest rates seems like a win-win,” he adds.

He currently pays his utility bills in cash or leverages loyalty programmes to avoid high-interest credit cards or buy now, pay later schemes.

He uses a mobile budgeting app to keep track of expenses and prioritise needs over wants to maintain financial discipline.

Mr Mittal’s cost-saving hacks include streamlining and cancelling unused subscriptions to avoid recurring charges and bulk buying groceries wholesale or during sales.

“I ensure I only buy when food items are nearing expiry to avoid waste and overspending. I'm also open to switching brands and stores if they offer better deals on similar quality products,” he says.

However, fluctuations in interest rates have not significantly dampened housing demand in the UAE, says Rajender Prasad, managing director of mortgage consultancy Money Maestro.

Demand for mortgages remains strong among first-time home buyers, he says.

“It has become widely acknowledged that acquiring property for self-occupancy is advantageous, serving as a means for individuals to build wealth over the long term rather than continuing to pay rent. Moreover, there exist strategies to mitigate the impact of interest rate variations on loan repayments,” he points out.

Last year, the average mortgage interest rates were at about 5.5 per cent, whereas presently, it’s in a range closer to 4 per cent, according to Mortgage Maestro data.

“We’ve observed a trend of interest rate softening over the last two quarters. Last year’s rates didn’t hit an all-time high compared to the 2008 market, where rates were in the range of 7 per cent or above,” Mr Prasad says.

Any further easing of interest rates will support both home buyers and real estate investors.

The middle-class segment, known for its price sensitivity, stands to benefit greatly from reduced interest rates, as it allows for greater savings and long-term wealth accumulation, he adds.