Thursday,14 December, 2017
Current issue | Issue 1367, (2 - 8 November 2017)
Thursday,14 December, 2017
Issue 1367, (2 - 8 November 2017)

Ahram Weekly

Collateral damage

Price hikes stand out as the biggest fallout from the liberalisation of the currency exchange market, reports Mona El-Fiqi

One of the main reasons the government was reluctant for years to liberalise the exchange rate market was fear of the consequences on prices. It was not mistaken. Since the Central Bank of Egypt (CBE) liberalised the foreign currency exchange in November 2016, Egypt’s headline inflation rate has been jumping in leaps and bounds, peaking at 33 per cent in July 2017, the highest in 30 years.

The government’s accompanying decision to cut subsidies on fuel, for the second time since the summer of 2014, compounded the problem. And the fact that subsidy cuts on electricity and water consumption were already in the works did not make things any easier. All these steps were aimed at containing the state’s budget deficit which reached around 12.5 per cent in fiscal year 2015-16. These measures were a requirement before the International Monetary Fund (IMF) approved a three-year $12 billion Extended Fund Facility for Egypt to help plug its financing gap.

Since July, inflation began easing slightly, reaching 31.6 per cent in September with officials reassuring the public that it is now on a declining path.

But consumers are not as optimistic. “Though a year has passed since the decision, the effect is still with us,” complained Sahar Mohamed, a government employee. “Prices increased several times since the decision and traders are taking advantage of the situation,” she added.

Mohamed blamed the government for leaving the markets uncontrolled and for the absence of implementation of consumer protection laws to protect consumers against the greediness of traders and producers. She added that not only prices of products had increased but that of all life expenses as well, including service fees for a mechanic, maid, doctors and school tutors. 

“Those individuals who raised their fees are not to blame because they are obliged to meet the daily basic needs of their families,” Anwar Al-Naqib, chairman of the Research Centre at Al-Sadat Academy for Administrative Sciences, explained. 

Looking ahead, experts predict inflation will keep dropping as the impact of the sharp depreciation of the pound against the dollar fades. The IMF expects inflation to average 22 per cent in the current fiscal year ending June 2018. Furthermore, economic experts estimate that inflation will continue to ease gradually into single digits in 2019. 

Egypt’s inflation rate should decrease by the beginning of next year, Minister of Finance Amr Al-Garhi said while attending a roundtable discussion hosted by CI Capital in the UK a couple of weeks ago. 

The surge in prices is attributed to the fact that Egypt is an import dependent country, Al-Naqib said. “Local industry depends on imported raw materials, intermediate products and machines so they, too, have to raise prices,” he said.

Nonetheless, the depreciation of the pound is an opportunity for the local industry which can provide local alternatives for imported goods that have doubled in price, Al-Naqib said. However, he added, the local industry has not yet been able to do that because it lacks flexibility. 

The government should focus on assisting the industrial sector, he suggested, by helping reopen the large number of factories which have shut down since 2011. “If Egypt has a powerful, competitive and productive industrial as well as agricultural sector, the negative impact of devaluation would be less chronic,” he said.

Al-Naqib pointed out that inflation directly impacts the poverty rate. Many poor families became extremely poor and some middle class families fell under the poverty line. 

Some 27.8 per cent of Egypt’s population live below the poverty line, up from around 25 per cent in 2011, according to 2015 figures by the Central Agency for Public Mobilisation and Statistics (CAPMAS). At that time the inflation rate stood below 10 per cent. 

To ease the burden of inflation especially on the neediest, the government has taken various measures, providing three million families with the social solidarity pension instead of two million and is targeting four million families, Al-Naqib said. 

Since November 2016 it also decided to double the amount allocated to individuals holding subsidy cards. After the devaluation, the amount was raised from LE15 to LE21 per month. Then in July 2017 it was upped to LE50 per month following a third wave of cuts in fuel and electricity subsidies.

Moreover, the Ministry of Supply and Internal Trade expanded the number of products that ration card holders can get from the government cooperatives to include meat, cooking oil, tea, sugar, rice and many other items. There are an estimated 70 million individuals benefiting from the ration card system.

The move taken by the government to cut subsidies again in July 2017 was praised by the IMF as a positive step towards economic reform, yet consumers opposed it since it helped up prices once more. They believed it would be better if the government delayed further subsidy cuts next year. “If the government really cares about consumers it would postpone cuts to avoid the multi-negative impact of its decisions on consumers,” said Saber Hashim, a teacher and father of three.

Hashim explained that cuts in fuel electricity and water subsidies pushed prices three times higher compared to before the devaluation. Meanwhile, his income increased by only 20 per cent. “I have to sacrifice my needs for those of the children.”

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