Egypt Inflation Rate Surges to Record After Subsidy Cuts

CAIRO (Capital Markets in Africa) – Egypt’s urban annual inflation rate accelerated in July to its highest level in decades, fuelled by a new round of subsidy cuts ordered under the government’s economic reform program.

Annual consumer prices in urban areas climbed 33 percent, up from 29.8 percent in June, according to the state-run CAPMAS statistics agency. The month-on-month rate accelerated to 3.2 percent from 0.8 percent in June.

Fuel and electricity price increases went into effect at the start of the new fiscal year on July 1, for the second time in less than a year. The measures are part of an International Monetary Fund-backed reform effort aimed at cutting the budget deficit, curbing government spending and drawing in sorely needed foreign investments.

“Inflation may rise to 36 percent in August and September, because it takes about three months for the full pass-through of the subsidy cuts into the economy,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. Starting in November, “we should start to see a significant drop in the annual inflation rate” because last year’s baseline will be higher than it’s been in recent months, El-Swaify said.

The IMF expects inflation to average 22.1 percent in the current fiscal year ending June 30, 2018. Authorities have said they are not planning further subsidy cuts during the year.

The reform efforts, which kicked off in November with the abandonment of most currency controls and fuel subsidy cuts, helped to secure a $12 billion IMF loan and an influx of foreign money into Egyptian debt. But they’ve also left the pound’s value halved relative to the dollar and driven up costs for consumers in the nation of 93 million, where about half live on or near the poverty line.

The central bank is scheduled to meet next week to decide on the benchmark interest rate, which it has already raised by seven percentage points since the pound was floated. El-Swaify said authorities are likely to hold rates because the earlier increases should be sufficient to contain inflation, which is driven by higher prices rather than a surge in demand.