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Risks from inflation
Published in Al-Ahram Weekly on 16 - 05 - 2019

Egypt's annual inflation rate eased to 13 per cent in April from 14.2 per cent in March, figures from the Central Agency for Public Mobilisation and Statistics (CAPMAS) showed last week.
Monthly inflation increased by 0.5 per cent, down from 0.8 per cent in March, the lowest month-on-month increase in three months.
Pharos Holding, an investment bank, attributed the lower inflation rate to the discounted food items the government had released in the market prior to the holy month of Ramadan.
A breakdown of the data showed that April's decline in inflation was driven by weaker food inflation, which rose by 13 per cent year-on-year last month, compared with 15.2 per cent in March.
Pharos expected inflation to accelerate, reaching a peak of three per cent month-on-month in June as a response to the next round of fuel subsidy reforms expected by the beginning of the 2019/2020 fiscal year.
Though the annual inflation rate has dropped, it remains above the Central Bank of Egypt's (CBE) target range of nine per cent plus or minus three for the end of 2020, reducing the possibility of interest-rates cuts at the CBE's Monetary Policy Committee (MPC) on 23 May.
Research firm Capital Economics said in a note that April's inflation data “means that the next MPC meeting on 23 May hangs in the balance”. But it still expected a 50 basis points cut in the benchmark overnight deposit rate to 15.25 per cent at next week's meeting.
Pharos expected rates to remain on hold until the fourth quarter of 2019, after which it expects another 100 to 200 basis points cut.
After almost a year of keeping interest rates on hold, 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.
High inflation rates continue to weigh on Egypt's economy. Fitch Solutions, a global intelligence firm, said in its Africa Monitor report for April that the still-elevated inflation is a downside risk for the economy and that it could weigh on private consumption in the near term, slowing the pace of job creation and capping private consumption gains.
However, the report said Egypt's economy would continue to outperform its regional peers in the 2019-2020 fiscal year. It said the weighted average GDP growth rate for the Middle East and North Africa (MENA) region was expected to stand at 1.9 per cent in 2018-2019 and 2.8 per cent in 2019-2020.
Egypt's GDP, however, is expected to grow at 5.3 per cent and 5.2 per cent for the current and next fiscal years, respectively, according to the report. It said that Egypt's growth in the near term would be mainly driven by hydrocarbon investments and government infrastructure projects.
Egypt's economic growth increased to 5.6 per cent in the third quarter of the current fiscal year, compared to 5.4 in the same quarter of 2017/2018, Planning Minister Hala Al-Said said last week.
She said that economic growth was targeted to reach 5.8 per cent in the fourth quarter of 2018/2019. Economic growth in the third quarter was mainly driven by five sectors, namely energy, mining, retail construction and real estate, Al-Said added.
In its recent Regional Economic Prospects report, the European Bank for Reconstruction and Development (EBRD) said that the sound implementation of reforms had helped Egypt achieve the highest growth rate in a decade.
It said that growth in the country had continued to accelerate in the past year, reaching 5.4 per cent year-on-year in the first half of the 2018-2019 fiscal year, the highest in a decade, after having recorded 5.3 per cent in 2017-2018.
The strong growth had been driven by tourism, natural gas production, telecommunications, construction and Suez Canal revenues, the report said.
Like Fitch Solutions, the EBRD report pointed to the high inflation as main risks to Egypt's outlook. It said that these “arise from a persistent wait-and-see approach taken by foreign investors and the erosion of competitiveness as a result of the recent appreciation of the pound and the stubbornly-high inflation.”
But it said that these risks were partially mitigated by the authorities' strong commitment to the implementation of structural reforms.
Egypt started implementing an economic-reform programme in 2016 backed by a $12 billion loan from the International Monetary Fund (IMF). A delegation from the fund arrived in Cairo last week to conduct the final review of the programme, after which the country should get the final tranche of the loan.
In a press conference upon the delegation's arrival, Finance Minister Mohamed Maait said that Egypt's budget deficit had shrunk to 5.3 per cent of GDP in the first nine months of fiscal year 2018/2019, compared to 6.2 per cent in the same period the previous year.
He added that during the same period, the primary budget surplus had increased to LE35.5 billion from LE7 billion a year earlier.
The ministry is targeting an inflation level of no more than 10 per cent in the 2019/2020 fiscal year and between six and seven per cent in 2020/2021.

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