Monday,18 June, 2018
Current issue | Issue 1332, (16 - 22 February 2017)
Monday,18 June, 2018
Issue 1332, (16 - 22 February 2017)

Ahram Weekly

High-cost reform

Further increases in inflation have been hitting many people’s pockets hard

People scout the markets for discounted products
People scout the markets for discounted products

Egypt’s annual headline inflation rose to 29.6 per cent in January year-on-year from 24.3 per cent in the previous month, a level not witnessed in 30 years.  
Inflation stood at a little over 10 per cent in January of last year. Food and beverages, healthcare, household appliances and furniture were among the areas which saw the highest increases.
“Why is everyone so surprised,” questioned Nashwa Mahmoud, a government employee. “In fact, most prices have increased way beyond the stated percentage.”
Mahmoud said the prices of two essential items had almost doubled. “Sugar and rice have both gone up from around LE7 per kg to LE13,” Mahmoud said, adding that she keeps an eye out for discounts and offers made by hypermarkets in the hope of finding cheaper prices.
She also sometimes shops in poorer neighbourhoods where prices are slightly cheaper, especially for fruit and vegetables.
The less fortunate must take more drastic measures. Fatma, a house help in Cairo, buys half the quantity of chicken she used to buy and keeps it for her children who are still growing and need protein.
“People are adjusting to inflation by cutting their consumption of the basics, not luxury items, and that is disastrous for the future,” economist Ihab Al-Dessouki said. “In these circumstances the poor are squeezed, and the middle class is being impoverished.”
Egypt began witnessing double-digit inflation starting in April 2016. This month’s announcement marks the third major hike in prices over three consecutive months. It comes on the back of the November 2016 floatation of the pound, coupled with the implementation of a value-added tax (VAT) and cuts in fuel subsidies.
The minister of finance told Bloomberg this week that inflation could continue to rise in February, possibly to peak in March, and then it would start subsiding. The monthly headline inflation rate rose from 3.1 per cent month-on-month in December to 4.1 per cent in January.
Many people are not as optimistic as the minister. Further energy subsidy cuts and hikes in electricity prices expected in the next fiscal year are likely to feed inflation further, and the government has scheduled a phasing out of subsidies on electricity over a five-year period.
Should that happen, prices would probably catch fire and that could threaten social stability, Al-Dessouki warned. He said that any subsidy cuts should be postponed because fuel is an essential component in the prices of all products. It was the fuel subsidy cuts in November 2016 that were partly to blame for the current high inflation, he added.
The Energy Committee in the House of Representatives, Egypt’s parliament, has asked the minister of electricity to postpone the scheduled hikes in electricity prices. Though the minister has said he will consider the matter, any postponement seems unlikely given that the ministry is already complaining of shortages of funds.
Moreover, Egypt is due for a review soon by the International Monetary Fund (IMF) to make sure its reforms are on track to receive the second tranche of the $12 billion Extended Fund Facility made available by the IMF.
The minister of electricity told the House of Representatives recently that electricity subsidies cost the government LE65 billion instead of the budgeted LE30 billion because of the floatation of the pound and the increase in oil prices.
Economist Omneia Helmi suggests that rather than further fuel subsidy cuts, the government should find a way to sell fuel at market prices to the owners of cars with powerful engines and foreigners residing in Egypt who should not be subsidised and encourage the use of natural gas.
A stronger pound would mean lower inflation, Al-Dessouki said, explaining that most of Egypt’s imports are essential goods and production inputs.
Helmi said a weaker pound would increase the imports bill for components needed for Egyptian manufacturers.
“We must work on deepening our industries, strengthening the backward and forward linkages between small and medium producers with larger ones to encourage them to produce and sell their parts and components to the larger Egyptian manufacturing companies and improve their quality rather than importing them,” she said.
The pound appreciated over the past week, decreasing from around LE18.5 per dollar to around LE16. “That is only a slight appreciation that will not make a difference to inflation,” Al-Dessouki commented.
The appreciation in the pound has been attributed to several factors, including an increase in hard currency inflows because of Egypt’s recent Eurobond issue and higher remittances.
These have been coupled with lower demand for hard currency, as outstanding transactions, whether for the repatriation of profits or pending letters of credit, are reported to be covered.
Banque Misr Chairman Mohamed Al-Etrebi said on television recently that his bank had been receiving triple the amount of hard currency it had before the floatation. The bank had received $6.8 billion in remittances alone, he said. Previously, individuals would withdraw their remittances to exchange on the black market, but this was no longer the case, he said.
Exports had increased 25 per cent in the two months following the floatation, Ahmed Kouchouk, deputy finance minister for financial policies, said on television on Monday.
Tourism is also improving. Denmark, Finland, Sweden, and Norway have lifted a ban on travel to South Sinai, and Russia is expected to lift the ban it has imposed since October 2015 following the crash of a Russian airline over Sharm El-Sheikh in South Sinai.
However, some observers warn that pressure on hard currency could build with the Omra and Hajj pilgrimage season looming. The Omra is currently on hold until March, and this will likely create demand for the Saudi riyal. The further importation of yameesh (nuts and dried fruit) during Ramadan would represent another pressure.
In order to assist people with their growing problems, the government last year increased the amounts allocated per person on the ration-card system from LE18 to LE21 per person per month. But the effects of that increase were largely wiped away by the subsequent price hikes of products that are distributed through the system.
The government is also making cheaper products available through cooperatives and mobile trucks. Al-Dessouki said he found the distribution of goods in trucks is “insulting” as it was not dignified to have to stand in line in the street to buy essential goods, he added.
Furthermore, distribution through trucks is not well-targeted, he said. People may not know the location of the trucks, or may not be able to reach their location and stand in line, he pointed out. Some individuals could be obtaining cheap goods and selling them elsewhere at a profit, he said, adding that such products should be sold through ration cards at cooperatives.
Both Helmi and Al-Dessouki called upon the government to foster competition and combat monopolies. “The government should impose severe sanctions on corrupt traders who hide goods to sell at a higher price on parallel markets,” Helmi stressed. She suggested that the government publish daily “reference” wholesale and retail prices and help lower transportation costs by improving roads in villages, small towns, and cities.
Should the government and private employers increase wages? “If you increase wages without increasing productivity and the quality of goods and services, you will end up with higher prices and fall into the trap of a vicious circle of higher wages and higher inflation,” Helmi commented.
Increasing productivity was the only real solution to combating inflation and the depreciating pound, Al-Dessouki said, adding that the depreciation of the pound was a symptom of an ailing economy that needed to increase productivity and exports and other sources of hard currency.
“Inflation should start dropping when Egypt produces more goods and services to increase the nation’s self-sufficiency rate, which helps satisfy domestic demand, increase export proceeds, and lower import needs,” Helmi added.
Lowering the fiscal deficit and financing it from real resources rather than printing money was also one of the real solutions to inflation.
The inflation figures are causing observers to speculate on what the Central Bank of Egypt’s Monetary Policy Committee (CBE-MPC) will do about interest rates in its meeting on 16 February.
Central banks typically use interest rates to meet their inflation objectives. While the London-based economic research consultancy Capital Economics expects a one per cent hike in interest rates because of the inflation spike, leading investment bank Pharos estimates the MPC will keep the rates unchanged.
“The costs of a rate hike outweigh the potential benefits at this point,” it said. The MPC raised interest rates by three per cent when it floated the pound in November 2016 to encourage savings in local currency.
The interest rate hike, Pharos said, had helped increase local currency deposits at commercial banks by LE122 billion in November and December 2016, compared to an average increase of around LE20 billion in January to October.
Aside from concerns about inflation, the economy has garnered some positive reviews. The French PNB Paribas Bank recently published a report which said that floating the pound, improvements in foreign currency liquidity, the accelerated pace of fiscal reforms, and the start-up of production at the Zohr Gas Field would lead to positive macroeconomic impacts.
The bank said the “public and external accounts will continue to show deficits in the medium term, and the authorities will have to deal with growing social pressures at a time of high inflation.” It said only the return to strong growth, via job-rich investments in non-energy sectors, would enable the Egyptian economy to pull out of a five-year slump.
Another report by PricewaterhouseCoopers, the global accounting firm, forecast that Egypt’s economy would overtake that of Italy and Canada by 2050.
However, the report said that achieving this for Egypt and a handful of other countries was dependent on the implementation of structural reforms to improve macroeconomic stability, diversification of the economy away from reliance on natural resources, and the development of more efficient political and legal institutions.

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