Sunday,23 September, 2018
Current issue | Issue 1309, (25 - 31 August 2016)
Sunday,23 September, 2018
Issue 1309, (25 - 31 August 2016)

Ahram Weekly

Feeling the pinch

New electricity tariffs, the expected value-added tax (VAT) and the possible increase in metro ticket prices are fuelling concerns about inflation, reports Doaa Farid

Feeling the pinch
Feeling the pinch
Al-Ahram Weekly

Egypt has been suffering from continuous price increases over the past five months, following a devaluation of the Egyptian pound in March and adding burdens to many people.

Last week, Minister of Electricity Mohamed Shaker added to these concerns by announcing new power tariffs for the 2016/2017 fiscal year that included higher-than-expected increases of 30 to 40 per cent across all consumption categories. 

The new tariffs, launched in 2014, allow the power ministry to impose up to a 20 per cent increase on prices at the beginning of each fiscal year. 

The industrial and commercial sectors are likely to suffer most from the increases, as theirs are higher than those of the residential brackets. The hikes have led to speculation that manufacturers might swell the prices of their products to keep their profit margins stable.

Economist at Mubasher Trade Egypt Rami Orabi said the rises would lead to an increase in inflation in the short run. “Inflation hikes will likely occur over the coming three to six months, especially after the forecast new devaluation of the Egyptian pound,” he said.

Egypt’s annual headline inflation was 14.8 per cent this month, the same level as last month but higher than the 8.3 per cent registered in the same month in 2015.

The Central Agency for Public Mobilisation and Statistics (CAPMAS) said in a statement that price hikes to food and beverage products by 19.1 per cent year-on-year and a 32.7 per cent soar in healthcare prices had caused a rise in annual CPI. 

According to Orabi, electricity prices are a small factor in the calculation of CPI, and the expected price rises for manufacturers will take time to appear in consumer prices.

Orabi’s view matches the inflation forecast for Egypt in the World Economic Outlook 2016, in which the International Monetary Fund (IMF) expects inflation to fall from 11 per cent in 2015 to 9.6 per cent and 9.5 per cent in 2016 and 2017, respectively.

However, according to a report from think-tank Focus Economics published in August, the March devaluation of the pound has been stymying efforts to curb inflation.

The announcement of the electricity price hikes caused Focus Economics to expect an upward push to the prices of goods and services, prompting a higher inflation forecast for 2016 to 11.7 per cent, 0.6 per cent higher than the July projection.

Arqaam Securities, a brokerage firm, expects annual headline inflation to rise to around 15 to 16 per cent in September after the effect of the electricity price hikes is felt. 

The purchasing power of consumers is also forecast to be affected by the introduction of the new VAT, which was approved by parliament in July. The VAT rate is expected to be 12-14 per cent compared to the previously disclosed 10 per cent. 

Minister of Finance Amr Al-Garhi said in a July press statement that the VAT could lead to inflation of between 0.5 and 2.3 per cent. A list of 52 products and services was published in May that will be VAT exempt, including basic food items and dairy products. 

Head of pressure group Citizens against Price Rises Mahmoud Askalani commented that higher inflation rates expected after the introduction of the VAT would likely cause a recession.

“Through our access to a wide range of consumers with different incomes, we know that the market is stagnant and people have started to reduce their purchases,” Askalani told the Weekly.

Some basic food products affected by price increases since the start of the fiscal year have also been affected by the falling exchange rate of the local currency that recorded LE11 per $1 in the unofficial market this week. 

The prices of meat and vegetables have increased by 20 per cent, according to the Cairo Chamber of Commerce.

Prime Minister Sherif Ismail announced last week that the government was considering increasing the prices of Cairo metro tickets. In March, the Ministry of Transport suggested a price increase to LE2 instead of LE1 per trip.

Around three million passengers use the Cairo metro every day, according to official figures. However, the ministry said earlier that the Cairo Metro Company was incurring LE20.5 million in monthly losses, as a result of subsidising the cost of tickets.

All  Heba Mahmoud, a 24-year-old housewife with a two-year-old child, said that she had started to feel the price increases. 

“All our monthly income goes on fuel and food costs. We can’t save anything anymore,” she said.

Mustafa Suleiman, an accountant who has two school-age children, said he was expecting increases in school tuition fees this year. “The new VAT will affect everything,” he said.

Café manager in Dokki Mohamed Ibrahim said he could not increase the prices of products immediately despite the rise in electricity tariffs. “We will have to wait a few months because we know that people are already burdened, we don’t want to lose our customers,” he explained.

Menna Abdallah, a working mother in Nasr City, said she and her husband had decided to cut spending on some products and services that she described as “becoming luxury items” like cigarettes, coffee products and mall and cinema outings, after they received an electricity bill in July that showed a 50 per cent increase.

A three-year $12 billion Extended Fund Facility (EFF) loan from the IMF is expected to place additional burdens on citizens, as it envisages cutting government spending on subsidies and wages.

But Minister of Supply Khaled Hanafi said the IMF deal would not negatively affect the prices of subsidised food commodities.

Askalani commented that traders would not wait for official increases, however. “They have spontaneously reacted to news of the loan by imposing increases on some products,” he said.

The writer is a freelance journalist.

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