Egypt’s cost of liv­ing soars as cur­rency dives

The Daily Star (Lebanon) - - BUSINESS - By Asma Al­sharif

CAIRO: An­nual con­sumer price in­fla­tion in Egypt’s cities soared to a sec­ond straight eight-year high in De­cem­ber, hit­ting 23.3 per­cent on the back of the gov­ern­ment’s de­ci­sion to float the pound, ef­fec­tively halv­ing its value.

Core in­fla­tion also jumped to 25.86 per­cent in the ur­ban ar­eas, the of­fi­cial CAPMAS sta­tis­tics agency said Tues­day.

Ur­ban con­sumer in­fla­tion hit an eight-year high of 19.4 per­cent in Novem­ber, the month when Egypt aban­doned its cur­rency peg of 8.8 to the U.S. dol­lar in a dra­matic move that has since seen the cur­rency de­pre­ci­ate roughly by half.

It ac­com­pa­nied the Nov. 3 move with a 300 ba­sis point in­ter­est rate hike to fight in­fla­tion­ary pres­sures.

De­spite the hike, how­ever, in­fla­tion has risen sharply and is ex­pected to climb fur­ther this year as the gov­ern­ment pushes on with eco­nomic re­forms, in­clud­ing fuel sub­sidy cuts and the im­ple­men­ta­tion of a value added tax. Those moves were re­quired to se­cure a $12 bil­lion In­ter­na­tional Mon­e­tary Fund loan.

In cities and towns, food and bev­er­age in­fla­tion touched 28.3 per­cent in De­cem­ber. Health care in­fla­tion stood at 32.9 per­cent while trans­porta­tion was 23.2 per­cent.

“Egypt now is in the eye of the pol­icy re­struc­tur­ing cy­cle, and the price is higher in­fla­tion and an over­all fis­cal deficit pend­ing a struc­tural change in gov­ern­ment spend­ing and gen­eral repric­ing of goods and ser­vices,” Arqaam Cap­i­tal said in a re­search note. “A re­ver­sal of over 50 years of com­pre­hen­sive gov­ern­ment sup­port will take time,” it said, pre­dict­ing in­fla­tion to re­main high in the first half of the year, av­er­ag­ing 20 per­cent in 2016/17 be­fore de­clin­ing to 18 per­cent in 2017/18.

Pres­i­dent Ab­del-Fat­tah al-Sisi is un­der in­creas­ing pres­sure to re­vive the econ­omy, keep prices un­der con­trol and cre­ate jobs to avoid a back­lash from the pub­lic. Sisi pre­dicted last month that the Egyp­tian pound would strengthen in the com­ing months and promised to en­sure ba­sics were avail­able and af­ford­able.

The gov­ern­ment has ex­panded its so­cial se­cu­rity net­work and some 70 mil­lion Egyptians have ac­cess to state sub­si­dized bread.

But Egypt’s non-oil busi­ness ac­tiv­ity shrank for the fif­teenth con­sec­u­tive month in De­cem­ber as in­fla­tion caused pur­chase costs to rise at a near-record pace.

Econ­o­mists ex­pect the ris­ing in­fla­tion to erode spend­ing power, hit eco­nomic growth and prompt fur­ther hikes to in­ter­est rates, which are al­ready up to 15.75 per­cent.

Egypt’s cen­tral bank has held in­ter­est rates steady at two mon­e­tary pol­icy meet­ings since the flota­tion, and some econ­o­mists ex­pect fur­ther rate hikes this year.

‘Egypt now is in the eye of the pol­icy re­struc­tur­ing cy­cle’

Econ­o­mists ex­pect the ris­ing in­fla­tion to erode spend­ing power, hit eco­nomic growth and prompt fur­ther hikes to in­ter­est rates.

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