Egypt's annual urban inflation rate increased slightly to 3.7 per cent in September compared to 3.4 per cent in the previous month, marking its lowest level since 2005 according to data from the Central Authority for Public Mobilisation and Statistics (CAPMAS). The decline in inflation came on the back of a drop in the prices of food and beverages, which represent the bulk of the basket of commodities and services by which the inflation rate is gauged, by 3.5 per cent year-on-year. Inflation is now lower than the Central Bank of Egypt's (CBE) target of nine per cent plus or minus three, in other words by between six and 12 per cent. This may not be entirely good news, as when inflation declines beyond a certain point this means that demand is too low. Central banks will often then decide to lower interest rates, thus increasing the money supply and giving demand a push. Egypt's inflation rate has been sliding for some time, raising the question of whether the CBE will cut interest rates to give a push to the economy, still suffering from the repercussions of the coronavirus, or whether it will keep it as it is in order to retain the appeal of the local currency as well as attract foreign investments in treasuries. The overall value of foreign holdings of Egyptian sovereign bills and bonds rose to $16.9 billion by the end of August from $14.1 billion a month earlier. Egypt pays the second-highest yield on sovereign bills among the world's emerging markets. Under the $5.2 billion stand-by facility Egypt has acquired from the International Monetary Fund (IMF) to face up to the negative effects of the coronavirus pandemic, IMF technical experts were to have consultations with Egyptian officials if September's inflation reading was less than six per cent. If it was lower than four per cent, the executive board of the IMF was supposed to convene with officials from the CBE to discuss it. Economists talking to Reuters earlier this week said that if inflation falls too quickly, the IMF might ask the CBE's monetary policy committee (MPC) to cut interest rates at its next meeting on 12 November. The CBE cut rates by a marginal 0.5 per cent in its last meeting, its first such move since the three per cent cut it decided on in March. The CBE is not enthusiastic about cutting rates again out of fears that it might lose foreign investments in treasury bills. It seems to be hoping that dollar flows such as from tourism, worker remittances, and foreign purchases of Egyptian treasuries will once again become stable. “I don't think they're comfortable cutting rates when the external balances are still under pressure. High real rates also keep the carry trade going,” said Mohamed Abu Basha, an economist with investment bank EFG Hermes. An IMF staff report last month did not define what period it would use to measure Egypt's inflation or when any consultation might be held. Neither the IMF nor the CBE immediately responded to requests for clarification. Egypt's subdued inflation is partly the result of the tighter control of the money supply since a 2016 IMF-sponsored economic reform programme, a concerted push to invest in agriculture, and a lack of consumer demand because of the coronavirus pandemic. M2 money supply growth, a measure of the amount of money in circulation, slipped to as low as 11.33 per cent last year from as high as 25.4 per cent in the wake of the three-year, $12 billion IMF reform agreement. Since the outbreak of the pandemic, M2 has once again begun climbing. Investment in agriculture, mainly by the government, reached a substantial 0.92 per cent of gross domestic product in fiscal year 2018-19, according to CBE figures. Food products form an important part of the consumer price basket used to calculate inflation. Inflation soared to a peak of 33 per cent in July 2017 after Egypt implemented austerity measures associated with the IMF agreement, including a fuel price hike, a 13 per cent value-added tax (VAT), and taxes on tobacco, while cutting the value of the local currency in half against the dollar. To tame inflation to such a degree in a lower-income emerging market like Egypt was an “exceptional achievement,” said Charles Robertson, chief economist at broker Renaissance Capital. “But I think the focus needs to shift in 2021-2022 to supporting growth,” he said, adding that manufacturing investment had not taken off partly because of the coronavirus. Central banks in developing countries have cut interest rates for 20 straight consecutive months, exceeding the easing cycles sparked by the 2008 financial crisis and in the wake of the 2010 Euro crisis, though the pace of reductions continued to slow in September. On 24 September, Egypt's MPC cut the overnight lending rate by 50 basis points to 9.75 per cent, saying that leading indicators over the summer pointed to a gradual recovery in economic activity. The CBE said it expected inflation to rise to the lower part of its 6-12 per cent target band in the fourth quarter due to unfavourable base effects. Bank of America Global Research said the 50 basis point cut might have been done in an attempt to pre-empt IMF pressure to reduce rates in November.
*A version of this article appears in print in the 15 October, 2020 edition of Al-Ahram Weekly
