Tuesday,12 December, 2017
Current issue | Issue 1357, (17 - 23 August 2017)
Tuesday,12 December, 2017
Issue 1357, (17 - 23 August 2017)

Ahram Weekly

Overshooting inflation

Increases in fuel prices and another one per cent on VAT have pushed inflation rates to their highest level since the 1980s, reports Mona El-Fiqi 

Overshooting inflation
Overshooting inflation

Egypt’s annual inflation rate went up to 33 per cent in July, compared to 29.8 per cent in June. The monthly headline inflation rate reached 3.2 per cent in July, compared to 0.82 per cent the month before, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS).

Pharos Holding, a local investment bank, attributed the increase to July’s second round of energy subsidy cuts, in addition to the increase in VAT from 13 to 14 per cent. According to Pharos, there have been inflationary pressures on all the items in the basket of commodities from which the inflation rate is calculated. 

While the monthly change in food prices rose in July from 0.5 to 2.5 per cent, the major contribution to the monthly inflation rate was attributed to non-food items including transportation, leisure facilities and medical care.

The inflation rate has been on the rise since the floating of the pound last November, hovering at around 30 per cent for the last four months.

“The increase in inflation has been driven by one-off factors. The most important has been the devaluation of the pound last November, but a series of indirect tax hikes and subsidy cuts over the past year have also accelerated the rise,” noted a report by Capital Economics, a UK-based research group.

The introduction of the value-added tax (VAT) in September last year to replace a general sales tax was another factor, as it covers a wider range of goods than the sales tax and was set at a higher level, pushing inflation up, according to the note. 

“By our estimates, it raised inflation by 1.5 per cent when it was introduced in September and by a further 0.5 per cent in July following the increase in the rate from 13 per cent to 14 per cent,” Capital Economics said.

The increase in the inflation rate will definitely have a negative impact on living standards since it has not been paralleled by rises in salaries and pensions, according to Heba Al-Leithi, a professor of economics at Cairo University. 

“While the inflation rate moved from single digits in the first quarter of 2016 to reach the current peak of 35 per cent, the rise in salaries in state-owned bodies came in at only 10 per cent. Meanwhile, the private sector is not obliged to pay a bonus to its employees,” Al-Leithi said.

Some families may be obliged to take their children out of school, according to Al-Leithi. There may also be a deterioration in the education and health of young people as a result of their leaving school, she said.  

Mohamed Mansour, the father of two children, said the increase in fuel prices had doubled bus fees for his children to take them to school. “I decided to take them myself on my way to work and a taxi will take them back home. This should save half the cost,” Mansour said.

The increase in electricity prices by 30 per cent last month is also giving consumers a hard time, in spite of the minster of electricity’s assertions that the recent hikes would only affect those in the highest consumption bracket. 

July’s inflation figures do not reflect the increases in electricity prices, which will come through when consumers pay their bills in August.

“I was shocked to find that July’s bill was LE3,000. I have refused to pay before asking the electricity company to check my consumption,” Ghada Ibrahim, a teacher living in New Cairo, said.

The prices of electricity in Egypt have witnessed major hikes over the past few years as part of a scheme to phase out subsidies by the end of fiscal year 2021/2022. Water bills are also set to increase starting from August, when price increases will be by up to 50 per cent.

Prices will start from PT45 per metre cubed instead of PT30 currently, and will go up to LE2.25 for those who consume more than 40 metres cubed of water per month. The Holding Company for Water and Sewage has also decided to increase sewage fees to 57 per cent of the total water price.

Internet services will increase as a result of the Ministry of Finance’s decision to apply the 14 per cent VAT rate to them.

But Capital Economics expects that the inflation will ease down soon. “The fading impact of the pound’s fall will cut inflation by as much as 10 per cent by early 2018. Similarly, the contribution of fiscal measures to headline inflation will decline by a further three to four per cent over the same period,” it said.

It expected the headline inflation rate to drop sharply to around 20 per cent around the end of this year, and then ease gradually into single digits in 2019. The IMF also expects Egyptian inflation to average 22.1 per cent in the current fiscal year ending at the end of June 2018.

Al-Leithi said the government should look into measures that would cut the deficits without adding to the inflationary pressures on the poor. “This could be done by cutting the subsidies provided to exporters, reducing incentives given to investors, imposing graduated taxes on businessmen, and rationalising the government’s expenditures,” she said.

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