Egypt’s Inflation Hikes In August To Its Highest Level In Seven Years

Egypt’s annual inflation rate has recorded its highest level in at least seven years by the weakening of the currency and an increase in electricity prices, as reported by Bloomberg.

The annual inflation has accelerated to 15.5% this month. According to data published by the state-run CAPMAS statistics agency, consumer prices rose 1.9% in August . Food and beverage prices, which account for the largest component of the basket of goods and services, climbed 19.3% in August compared to the previous year and 1.6 % in the month.

Reham El-Desoki, senior economist at Dubai-based investment bank Arqaam Capital, said “The numbers were going in that direction.”  She added pessimistically, “You have a very strong negative base effect at this point and it’s going to get worse.”

In addition, Reham El-Desoki predicted the inflation would accelerate to as much as 20% by the end of the year. The August rate was the highest since Bloomberg started tracking the data in 2009, and El-Desoki said it was the highest since December 2008.

Inflation is hiking  at a high speed as Egypt tries to finalize a $12 billion International Monetary Fund (IMF) loan. In this context, the government has pledged to implement a range of economic reforms, including cutting subsidies and the new value-added tax (VAT) which has been approved by the parliament last month.

El-Desoki pointed that the acceleration in the inflation rate in August is related to many factors as the “pass-through effect from the continuous fall of the Egyptian pound” on the black market and the increase in electricity prices by as much as 47 % last month. “The pound is trading on the black market at a discount of about 30%to its official rate against the dollar,”said Bloomberg.

Last March, the central bank of Egypt (CBE) devalued the currency by about 13 %in an attempt to attract investments and ease a dollar shortage hampering growth,however the situation became worse.

Moreover, economists have said the new 13 % VAT, which will rise to 14 %in the next fiscal year, will add as much as 2 % points to headline inflation.

Moody’s Credit Rating Scale Agency predicted in its most recent report on Egypt that the government will most likely fall short of its targeted budget deficit.

Moody’s predicts that the budget deficit will reach 12% this year compared to the 9.9% rate which has been predicted by the Egyptian government.

In its report, Moody’s said that it doesn’t expect the Egyptian government to succeed in allocating its expected revenues for this fiscal year especially after decreasing the value added tax law (VAT), which was passed by the Egyptian parliament, to 13% instead of 14%.

In this context, the analysis reported that the government will fall short of its targeted budget deficit—at 12% instead of 9.9%. This is due to the expected “slippages in revenue targets” and Moody’s expectation that the GDP will only grow by 3.5% instead of the government’s projection of 4%.

Moody’s also explained that with the increased number of exempted goods and services, the VAT “will result in a revenue shortfall of EGP 12bn, equaling one-third of the expected VAT revenue increase for fiscal year 2017”.

However, the minister of investment said earlier that the VAT will be increased to 14% in the next fiscal year, and Moody’s expects that “some of this shortfall” will be made up for through it.”

Moreover, Moody’s expects that inflation will worsen after activating the VAT.

On the other hand, Egypt isn’t providing the jobs to keep pace with the rising cost of living. Unemployment has hovered around 13% for several years, and that figure is roughly double for young people between 15 and 29 years old, who make up about a quarter of Egypt’s population of 90 million,according to Wall Street Journal.

The country’s economic crisis has intensified amid seeking the IMF loan agreement as the Egyptian government is trying to implement the IMF economic reform project. However, the Egyptian officials acknowledge that introducing those changes without overwhelming citizens with higher expenses and painful shortages is a tall task likely to face stiff political resistance.