CAIRO: The fall in inflation that global recession is expected to spur is a popular silver lining for officials and businesspeople here, especially given Egypt's record-snapping rates this year. But Egypt's soaring consumer price index is not just about outside pressures, Citadel Capital's Managing Director Hisham El-Khazindar said Monday at the first panel session of this year's Euromoney Conference. In May, the state cut a variety of energy subsidies, helping propel prices to their current levels. "Thank God, oil prices have gone down, commodity prices have gone down, El-Khazindar said. "But some painful internal inflation needs to keep taking place. The state should not let the threat of inflation deter them from cutting subsidies, he said. "Nobody likes inflation, he said. "But sometimes you have to purge the system. Many predict that a worldwide slowdown and the accompanying drop in demand for commodities will ease inflation, giving the Central Bank more space to lower interest rates and spur local financing. Inflation hit a 16-year high in the year to August, reaching 23.6 percent, before falling slightly to 21.5 percent in the year to September. A nasty possibility if this figure stays high is a local version of stagflation, a situation where economic growth slows but inflation rises, as occurred in the US during the 70s, when oil prices soared and state regulations caused wages and prices to push one another in an upward spiral. So far dropping global food prices have been slow to transfer to Egypt, a problem variously linked to demand spikes during Ramadan and import taxes. "We have to accept that our system is not 100 percent efficient. As we felt a lag in price increases, we will feel a lag in price decreases, said Wael Ziada, head of research at EFG-Hermes. The poor bear the brunt of this, said Ritva Reinikka, director of the World Bank's Social and Economic Development Group in the Middle East and North Africa. "We always want to emphasize that it is the poor people who pay for inflation, she said. "What we need to make sure of is that when commodity prices go down, these prices are passed on to the poor, said Taher Helmy, senior partner at Baker & McKenzie and former head of the American Chamber of Commerce. "We definitely have to have some balance. To ensure this, private firms must work alongside the state, he said. "I don't want to put all the onus on the government. The private sector does have a role. Earlier this year, inflation hampered spending among "deal-hungry Egyptians, said Richard Daly, chief executive of Vodafone Egypt. Property prices and salaries rose alongside, threatening the profitability of Egyptian businesses, he said. He is confident inflation will drop now, he said, giving Egypt the opportunity to emerge in a "new world order in a brighter position. Many panel members said it is vital that Egypt look to the Gulf for investment as credit markets tighten in the West. "Unless any of us assumes oil prices are going to go down to $30 - and I don't think that's on anyone's radar - you are going to have excess capital in the Gulf, he said. Continuing to privatize companies - even as Western governments snatch up banks and bail out other industries - will help draw them. A global slowdown will hamper tourism, exports and other fields, said El-Khazindar. "You can't do anything about that. One thing you can do is continue to encourage foreign direct investment. Although the World Bank considers Egypt one of the best reformers, it still has a long way to go to make business here appealing, said Reinikka. Egypt ranked 114 out of 181 countries on the Bank's "Ease of Doing Business scale this year. Helmy agreed Egypt should focus on the Gulf for at least the next couple of years. The state should also pump cash into infrastructure projects and bolster public-private partnerships, he said. Egyptian banks also need support, he said. "The fact that our financial sector has not been affected is very good news, he said. "At the same time that shows a symptom. The banks have not been lending to the market in a way that will help it move forward.
