Egypt Core Inflation Nears 12-Year High After Pound Slumps

CAIRO (Capital Markets in Africa) – An Egyptian consumer price gauge that strips out volatile items rose the fastest in almost 12 years in December, after the central bank abandoned currency controls and triggered a slump in the pound.

Annual core inflation climbed to 25.86 percent, its highest level since February 2005, according to data compiled by Bloomberg. Earlier, the state-run statistics agency reported that annual urban inflation accelerated to 23.3 percent in December, its highest since Bloomberg started tracking the data in 2010. Food prices, which account for the largest single component in the basket of goods and services, surged 28.3 percent in December.

The rate for both measures decelerated on a month-on-month basis, indicating weaker demand for goods that have suddenly become much more expensive in a nation where nearly half the population lives near or below the poverty line. The surge in prices is likely to make it more difficult for the government to take other measures, such as an expected reduction of fuel subsidies, that would deepen the hardship of tens of millions of Egyptians.

The central bank won’t rush to revise borrowing costs again, Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes, said in e-mailed comments. “We think they’ll need to see one to two more inflation prints before deciding on rates,” he said. “Future rate movements depends partially on the timing of upcoming fuel price hike.”

Currency Slide
The pound has lost more than half its value since the reforms were enacted. The measures helped Egypt stem a hard currency crisis and finalize a $12 billion International Monetary Fund loan, and officials have said the pound’s slide is temporary and to be expected.

While Egypt’s benchmark EGX 30 Index of stocks has surged more than 50 percent to a record since the currency controls were lifted, the local currency’s weakness, means the gauge is still trading at a 27 percent discount to its level prior to the devaluation.

High annual headline inflation is expected to continue for several years before dropping to single-digit levels by the end of 2019 or early 2020, Reham ElDesoki, senior economist with Dubai-based Arqaam Capital, said in a research note.

“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,” she said. “A reversal of over 50 years of comprehensive government support will take time and is a welcome change to put Egypt on a more sustainable path to growth and fiscal consolidation.”