As Essam, a 34-year-old computer programmer, started to calculate the substantial increases in his daily expenses as a result of the rises in the prices of fuel and cigarettes, he said that he did not expect the price hikes to stop at that. “Everything else will follow: food, the mobile bill, everything but the salary, of course,” he said. The government has reduced energy subsidies in the new budget in order to try to ease the country's budget deficit to 10 per cent of GDP. Gas and electricity subsidies were cut last week, followed by a rise in sales taxes on alcohol and cigarettes. President Abdel-Fattah Al-Sisi defended the decisions as the only way to save the nation from “drowning in debt”. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS) the annual urban inflation rate registered 8.2 per cent in June, the last month before applying the price increases with the beginning of the new fiscal year in July. Inflation in June was pushed by a hike in poultry and vegetable prices. Annual food inflation reached 11.2 percent, while the general annual inflation rate was only 8.2 per cent .The cabinet expects inflation to jump to double digits in the months to come as a result of the energy price increases. Abu Bakr Al-Guindi, head of CAPMAS, said at a press conference last week that it was expected that the rises in fuel prices might lead to increases in products and services other than transportation. But he said that any increases should be limited, as the share of transportation in the total cost of food production did not exceed five per cent. Inflation typically rises before and during the fasting month of Ramadan, as demand for food and beverages increases. Mohamed Abu Basha, an analyst at EFG-Hermes Holding, expects inflation rates to increase to 12 per cent by the end of the year and to leap to 15 per cent by mid 2015, due to the impact of the recent government decisions to raise energy prices, as well as applying the value added tax expected in January or February of next year. “It should take four or five months for these decisions to be completely reflected in prices in the market and to feed inflation figures due to the already weak purchasing power of consumers,” he explained. Abu Basha said that the impact on consumers would be considerable, as it was not expected that the rise in commodity prices would be accompanied by a similar rise in salaries or wages. It will be difficult, with consumer purchasing power already low, for the government to reach its target of a growth rate of 3.2 per cent, he said, adding that 2.9 per cent could be a more realistic target. Although the government's decision to raise energy prices would have a negative impact in the short term, Abu Basha believed that in the medium and long terms there would be a positive impact on the economy. He said the government was preparing the way to put the economy back on a path towards recovery. Following last week's decisions, the army announced it would use its buses to transport civilians and sell food at a discount amid concerns that the decisions to raise energy prices would cause a rise in the cost of consumer goods. The government started offering food at reduced prices in its outlets and running more public transport buses to avoid increases in taxi and microbus tariffs and reduce the burden on the poor. CAPMAS research found that a quarter of microbus drivers had followed the government's pricing guidelines, while 50 per cent wanted to impose a 50 per cent increase on passengers. The remainder wanted to see prices double. Abdel-Moneim Al-Sayed, Director of the Cairo Centre for Economic and Strategic Studies, said the inflation rate could jump to 10 per cent during July and August. “The decisions to reduce subsidies were taken without introducing measures to protect the poor from a likely speed up in inflation,” he said. He added that the fixed basket of goods and services measured in the CAPMAS statistics did not represent the actual goods that people consumed. Inflation figures could jump even further if the government didn't find ways to monitor the market and stronger mechanisms to control prices, he said. “Traders and merchants are greedy, and they will not stop short from adding even more to their profit margins,” Al-Sayed said. While a major reaction is not expected, “the government doesn't have the required social safety net to sustain the increase in prices, and this is a major concern,” he said. Inflation rates would continue to increase in the future, as food prices increased worldwide, he said. The problem would be aggravated by the government's five-year plan to cut the subsidies on gas and electricity, forcing a jump in the cost of other consumer goods, basic commodities and production inputs. If the measures the government was taking to control prices failed, inflation could reach even higher levels, he said. “Alongside implementing firmer way to monitor the markets and to protect consumers, the government needs to adjust the laws to set harsher punishments and more severe fines for violators. It also needs to issue new regulations demanding that producers come clear about production costs and profit margins,” Al-Sayed concluded.
