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Reining in inflation
Published in Al-Ahram Weekly on 18 - 04 - 2019

Inflation has been on the rise in Egypt over recent years, attributable to the floatation of the Egyptian pound in late 2016 as well as energy subsidy cuts.
The floatation caused the pound to lose 50 per cent of its value, leading to a rise in prices across the board. Inflation reached a peak of 35 per cent in July 2017 but began to ease steadily afterwards.
Though the floatation of the pound prompted inflation to rise, experts believe that this has not been the only reason.
In a seminar organised by the Egyptian Centre for Economic Studies (ECES), a think tank, in Cairo this week, experts concurred that the reason for the rise in inflation was not only the floatation but was also due to structural and institutional rigidities in the economy.
A study by professor of economics at the American University in Cairo (AUC) Diaa Noureddin found that relative price variability (RPV) and excessive monetary growth, mainly used to finance the country's budget deficit, had also been driving the rise in inflation in recent years.
The study showed that Egypt, in comparison with 84 other countries, had the highest RPV, monetary growth and inflation rates in the period between 2011 to 2018.
Omar Al-Shenety, managing director of Multiples Group, an investment bank, agreed. He said there were factors affecting the inflation rate that were outside the government's control such as petroleum prices but that there were others it could control such as the money supply and RPV.
Al-Shenety said Egypt had an “identity crisis” when it came to how the market was administered. “We should either implement price liberalisation where prices are determined in accordance with the market, or we should follow an administered system where policy-makers control prices,” he said during the seminar.
He said he disagreed with the Central Bank of Egypt's (CBE) decision to hike interest rates by seven per cent following the floatation of the pound as a tool to control inflation.
He said the increase in inflation following the floatation had not been due to an increase in demand but had been the result of a supply-side shock, meaning that raising interest rates to contain demand was not the right approach. The solution entailed leaving the economy time to adapt, he said.
Hani Tawfik, former chair of the Egyptian and Arab Private Equity Association, had a similar opinion. He said that raising interest rates was not the best solution to containing the jump in prices following the floatation.
As long as Egypt consumed more than it produced and imported more than it exported, it would continue to suffer from high inflation, he said.
Tawfik also spoke about the importance of the CBE being independent from the government, warning of the temptation for it to print money at the government's behest.
The experts concurred that structural and institutional reforms were needed to rein in the rise in inflation.
Noureddin's study recommended structural reforms that included a comprehensive approach to price liberalisation that would see a revision of the legal framework and regulation mechanisms and the optimal sequencing of any price increases.
As for institutional reform, the study recommended the setting up of an independent body to oversee public finances and move towards an inflation-targeting monetary policy regime.
The study also recommended fiscal rules such as setting a ceiling on public debt and the budget deficit so as not to prompt an increase in the money supply to cover the deficits.
Egypt's headline inflation eased slightly from 14.4 per cent year-on-year in February to 14.2 per cent in March. Inflation is above the upper bound of the CBE target range of nine plus or minus three per cent until the end of 2020.
The recent fall in inflation was driven by a reduction in food inflation. The latter, which accounts for 40 per cent of the basket of goods and services used to calculate the inflation rate, dropped from 15.4 per cent year-on-year in February to 15.2 per cent last month.
The relatively high inflation in March reduces the possibility of the CBE cutting interest rates in its Monetary Policy Committee (MPC) meeting in May.
The CBE resumed its easing cycle in February, lowering the overnight deposit and lending rates by one per cent to 15.75 and 16.75 per cent, respectively. Before these moves, the CBE had left interest rates unchanged since May 2018 due to inflationary pressures resulting from subsidy cuts in 2017/2018.

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