World Economic Outlook projects Egypt’s inflation rate to rise slightly higher than expected
Courtesy: International Monetary Fund
 

Projections for the rate of inflation in Egypt in the current and coming year increased slightly in the World Economic Outlook (WEO) report, which was released on Tuesday by the International Monetary Fund and World Bank.

The October report projected that Egypt’s inflation rate would hit 20.9 percent in 2018, up from the 20.1 percent that the WEO projected in its April report. The new report also forecast that Egypt’s inflation rate would hit 14 percent in 2019, compared to the April estimate of under 13 percent for the same year.

The October outlook was released during the IMF and the World Bank’s annual meetings, which were took place this year in Bali, Indonesia. The meetings, which are taking place on the 10th anniversary of the 2008 financial crisis, were launched on Monday and will last until October 14. This year’s annual meetings come amid turbulence in emerging markets and a surge in global oil prices.

Egypt’s inflation rates have recently receded,  after peaking at 34.2 percent in July 2017. The slower inflation rates in recent months have been attributed by economists to the change in the base year in the calculation, as 2018 prices are being compared to ones that skyrocketed in 2017.

General prices soared in Egypt after the currency exchange rate was liberalized and energy prices were hiked in November 2016 in order to seal off a loan agreement with the IMF that facilitated financing worth US$12 billion to be dispersed over three years.

But as inflation rates slow down, economists warned of the impact of the recent surge in global oil prices on general price levels in the coming period.

Global oil prices spiked in recent weeks, as Brent crude, the global benchmark, hit $86 per barrel last week, the highest price in more than four years. This recent surge follows concerns over decreasing supply from Iran due to US sanctions.

Higher oil prices have a negative impact on Egypt’s state budget because of subsidies on energy. A higher budget deficit could be financed through more consumption taxes if current economic policies remain in place, which would lead to higher inflation rates, financial economist Mohamed Sultan told Mada Masr in a previous interview.

The government would also have to raise fuel price for consumers more than it had originally planned, leading to higher inflation rates, Sultan added.

Egypt is committed, per the terms of its agreement with the IMF, to eliminate fuel subsidies, except those on LPG and natural gas, by 2019. In the third review of the terms of the financing program, the IMF staff noted the risk of rising global fuel prices that could prompt a large adjustment in energy prices to consumers.

In response to the surge in inflation that followed the liberalization of the currency, the Central Bank of Egypt resorted to raising interest rates to curb the inflationary effect of austerity measures. But as inflation rates receded, the CBE began cutting interest rates. This easing of the monetary policy, however, was interrupted by the turbulence in emerging markets, leaving the interest rate in Egypt unchanged for several months.

The higher interest rates had a negative impact on private sector growth, according to the PMI and Business Barometer surveys.

Nonetheless, the World Economic Outlook report kept growth projections unchanged for Egypt, despite a cut in growth projections for the Middle East, North Africa, Pakistan and Afghanistan. The outlook projected that the Egyptian economy would grow by 5.3 percent in 2018 and by 5.5 percent in 2019.

This growth projection reflects “a recovery in tourism, rising natural gas production and continued improvements in confidence due to implementation of an ambitious reform program supported by the IMF’s Extended Fund Facility,” according to the October report.

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