Everything from food items to electricity bills has increased noticeably in price since the beginning of the year, reflecting a sharp rise in inflation. The inflation rate for August, released earlier this month, was 15.5 per cent year-on-year, the highest in more than seven years. Inflation has been on an upward trend for the past couple of months, and in July it had reached a record level of 14 per cent. This is “evidence that price pressures have continued to mount following March's devaluation of the pound,” said a note by Capital Economics, a London-based economic research consultancy. The pound was officially devalued by 13 per cent in March in an attempt to close the gap with the black market rate. But the move was not successful, and the pound continues to trade at 30 per cent higher on the black market. Other factors have also stoked inflation. The new value added tax (VAT) that replaces the existing sales tax went into effect this month, increasing the prices of some goods and services. Taxes on mobile phone services rose to 21 per cent from 15 per cent under the previous sales tax. Prepaid cards, widely used by Egyptians, are subject to a lower tax, and consumers will now pay LE11 for pre-paid cards previously priced at LE10. The National Telecommunications Regulatory Authority issued a statement with the prices for the pre-paid cards following market confusion and exploitation by some traders. Cigarettes are also now subject to new taxes that can reach more than 50 per cent of their price. Taxes aside, Egyptians are now also paying extra for electricity due to the application of a five-year plan to phase out electricity subsidies. “There was a sharp rise in housing and utilities inflation, from 2.1 per cent to 7.9 per cent year-on-year, after the government announced hikes to administered electricity tariffs,” Capital Economics said. “With further subsidy cuts on the cards and the pound set to fall again, the inflation picture is unlikely to improve any time soon, and we expect additional rate hikes over the next twelve months,” it added. Food inflation increased for a fifth consecutive month, reaching 19.3 per cent year-on-year, a five-year high, it said. The new VAT should not impact on food prices as essential food items, dairy products, baby milk and nutritional supplements are exempt from the new tax. “As part of the conditions attached to Egypt's deal with the International Monetary Fund (IMF), the authorities will have to impose further subsidy cuts and also let the pound fall again,” Capital Economics said, adding that the pound could lose a further 25 per cent of its value against the dollar by the end of next year. Egypt has agreed with the IMF a $12 billion loan over three years. The forecasts are that the Monetary Policy Committee (MPC) of the CBE, scheduled to meet on 22 September, will raise interest rates as a measure to control inflation. The investment bank Pharos forecasts that the MPC will raise policy rates by one per cent in the meeting “due to inflationary concerns and in preparation for devaluation in order to increase the attraction of holding the pound versus the dollar and in a bet to attract foreign fund inflows into the pound-denominated fixed income market after devaluation.” It highlighted that “while current growth dynamics are not supportive of a hike in rates, this will be implemented with the intention to resolve the currency shortage, a key obstacle for GDP growth.” It cited the Industrial Production Index (IPI), a leading indicator for real GDP growth, which has shown weaker growth potential as a result of the foreign exchange shortage.
