Egypt to host the second trilateral meeting over GERD in December    Lebanon's Speaker Berri says situation in Lebanon getting more complicated: Al Joumhouria    Impeachment testimony comes from White House budget official    Former Liverpool, Leeds defender Matteo has brain surgery    Cardiff appoint Harris as new manager    The Jobs with the best and worst heart health according to Bupa study    Rate cuts to make Egyptian real estate investments bloom: developer    Ennahda's choice Jemli tapped to be Tunisia PM, faces big challenge    Egypt's Cabinet reviews Tourism Development Authority plan as part of Egypt Vision 2030    Turkey says it bought Russian S-400s to use them, not put them aside    Hoeness era ends at Bayern as turnover tops 750 million euros    Protests strike Iran cities over gasoline prices rising    European markets close higher as U.S.-China trade deal hopes return    7 states voice support for Syria's sovereignty in joint statement    Gold falls as trade optimism derails safe-haven demand    UNHCR adopts member states recommendations on Egypt's report on state of human rights    Children are nearing slavery due to digital development: Al-Azhar grand imam    Egypt issues longest-term international bond with maturities of 40 years    Al-Azhar grand imam arrives in Rome to attend summit promoting child dignity    Big production Mamalek El-Nar to scan Ottomans' history on Saudi MBC    Bridging East and West: Egyptian musicians Abdallah Abozekry and Ali Baghdady in Paris concerts    Six people killed, 16 injured in fuel pipeline explosion in Behaira    Volume of non-oil trade exchange between Egypt, UAE reached 24.5 billion dollars within 5 years: UAE economy minister    Liverpool's forward Salah out of Egypt games with ankle problem    GERD: An ‘adaptive' agreement    A film is born    10 tips to have your 30s starting a lifelong success    Nike to investigate its Oregon Project following Mary Cain's NYT op-ed    ‘Shining' sequel ‘Doctor Sleep' targets $25 mln opening, has Stephen King's blessing    Sisi: Egypt believes in comprehensive approach to human rights    Egypt's bourse, banks to close Sunday to mark Prophet Muhammad's birth    Egypt rejects politicised reports on human rights conditions – parliament    Egypt to vote on 3-month extension of state of emergency Monday    Jurgen Klopp gives injury update on Egypt's Mohamed Salah    Al Pacino says follows this mantra on every acting job    Remembering Mustafa Mahmoud, philosopher of his time    Court sentences six to death, 41 to lifetime imprisonment violence related case    Trump says he would release Mideast peace plan after Israeli elections    ACWA Power compares 3 bids to supply production units for Luxor power station    What do you know about gold alloying?    NBE announces EGP 2.5m prizes for handball youth teams for their world achievements    Jennifer Lopez evokes Egyptian outrage post her North Coast performance    Al-Sisi honours Egypt's scholars on Science Day    IS claims responsibility for suicide bombing killing 63 in Afghan wedding    Political parties gear up for parliamentary, senate, local elections    Unprecedented Glory: Egypt win Men's U-19 World Handball Championship    12th National Egyptian Theatre Festival fuel up public theatre art scene    Ministry of Environment has a plan for "black clouds season"    

Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.

Sliding inflation
Published in Ahram Online on 16 - 10 - 2019

When Egypt began its International Monetary Fund (IMF)-backed economic reform programme in November 2016, inflation shot through the roof, reaching an all-time high of more than 30 per cent in the summer of 2017. At the time, the IMF said it had not seen such high inflation rates coming. Three years later, inflation in Egypt is at its lowest level in seven years at around four per cent.
Inflation has been on a downward trend since May 2019. In September 2019, it slid to 4.8 per cent year-on-year against 6.7 per cent in August 2019. This level had only been attained once before in November 2012, according to investment bank Pharos Holding. Monthly inflation in September registered a small growth of 0.3 per cent, down from 0.7 per cent in August.
The decline was well below the estimates of investment bank Beltone Financial, which had estimated inflation at 5.9 per cent. In a research note, Beltone said that “the favourable base effect, the strength of the pound, and more cautious spending behaviour have continued to reflect positively on the monthly change.”
Food and beverages recorded negative price growth for the first time at -0.6 per cent year-on-year in September compared to 6.1 per cent in August, also a new record, Pharos said. The highest hike in prices was transportation, growing at 15.8 per cent year-on-year, followed by education at 14.7 per cent in September.
On a monthly basis, categories such as food and beverages, housing and utilities, and education recorded negative growth rates in September, signaling a reduction in the prices of several items. The highest growing category included transportation, growing at eight per cent month-on-month, an unusually high growth rate apart from 27. 8 per cent growth in June 2018 that was triggered by the removal of fuel subsidies, Pharos said.
Although inflation is now below expectations, expert Hani Tawfik does not think the sharp drop in inflation is a healthy sign.
He said what had happened in 2016 was not a classic increase in the inflation rate, but rather a jump in prices due to the floatation of the pound and a subsequent increase in the cost of importing or producing goods because of currency depreciation.
He believes the low inflation today was the result of recession, a decline in effective demand, a freeze of the liquidity of bank deposits and real estate, and a rise in poverty levels. Tawfik explained that what he described as an “unnecessary” hike in interest rates following the floatation had caused costs to increase and thus prices, resulting in further economic slowdown.
The increase in interest rates had led to a larger budget deficit, greater public debt, and higher government debt-servicing. It had also led companies to suffer because they had to pay higher interest rates on their borrowing, therefore affecting profits and financial positions. The stock market had also suffered because any increase in interest rates “is the first and biggest enemy of the stock exchange.”
Because of the higher interest rates, people had chosen to deposit their money in banks at the expense of direct and indirect investment, he said. The increase in interest rates had attracted liquidity into savings deposits and bank certificates, affecting trade and causing a recession.
Those who had not put their money in the banks had turned to real estate as a store of value, encouraging developers to build more projects, including the state. The share of the real-estate sector in gross national product had risen in an unprecedented manner, and the activity had entered a period of severe slowdown, Tawfik said.
This could change, however, as experts believe that the shrinking inflation rate is pressuring interest rates to drop. The persistence of the deceleration in inflation and its fast pace, coupled with expectations that it could persist until November 2019, has made a rate cut by the Central Bank of Egypt (CBE) on 14 November likely, however probably of around 50 basis points (bps), Pharos said.
The CBE's Monetary Policy Committee (MPC) meets approximately every six weeks to decide on interest rates, and its next meeting is on 14 November. The CBE has already cut interest rates by a cumulative 250 bps during the past two policy meetings.
Pharos said it sees inflation remaining in the single digits through 2019 and 2020. It forecasts that it will end 2019 at an average of 8.9 per cent year-on-year and end fiscal year 2019-20 at an average of 6.7 per cent.
UK-based research consultancy Capital Economics is more optimistic, with its inflation forecasts saying it is “likely to remain relatively subdued and is unlikely to rise above the mid-point of the Central Bank's target of nine per cent plus or minus three per cent on a sustained basis.”
Capital Economics also believes the MPC is likely to push ahead with another interest rate cut at next month's meeting. It has raised its expectation for a rate cut to 100 bps to 12.25 per cent. Overnight deposit and lending rates, as well as the rate of main operations, today stand at 13.25 per cent, 14.25 per cent, and 13.75 per cent, respectively.
Beltone Financial expects a further 300 bps cut in 2020.
In September, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced that it was using 2018-2019 as a base period, with weighting from its Household Income, Expenditure and Consumption Survey (HIECS) for 2017-2018. This had been done to provide new weighting for the basket of categories that are used to calculate inflation that are more reflective of the population's consumption patterns, Pharos explained.
To link the 10th consumer price index (CPI) with the 9th, which had used January 2010 as a base period and weights derived from the 2008-2009 HIECS, CAPMAS had rescaled the CPI indices until August 2019 to the new base, a press release by the CBE said.
The rebasing consists of linking growth in the price index to a more recent year and hence more accurate comparisons, Pharos said. It was a good opportunity to change the CPI basket components, add or remove categories, and modify their weights based on national surveys, it said, pointing out that the weight of the urban basket of goods had been reduced to 50.3 per cent from 54.3 per cent previously, hence giving more weight to the rural basket in the total CPI basket.
The categories that saw their weights reduced in the CPI for the whole of Egypt included food and beverages, which saw their weight reduced from 44.2 per cent to 35.9 per cent. Clothing and footwear and communications also saw their weights reduced. The remaining nine categories had all seen their weights increased, Pharos said.
These include alcohol and tobacco, whose weight has changed from 2.4 per cent to 4.6 per cent, healthcare, going from 5.9 per cent to nine per cent, and transportation, going from 4.6 per cent to six per cent.
“The rise of transportation's impact on inflation was not going to be possible without the new weights. Similarly, the rising impact of the utilities category might underline a rise in the cost of living in Egypt,” Pharos said.
*A version of this article appears in print in the 17 October, 2019 edition of Al-Ahram Weekly.

Clic here to read the story from its source.