The month of June witnessed a notable increase in the inflation rate. Economic analysts believe that the devaluation of the Egyptian pound significantly increased the prices of all commodities, but this was not the sole reason. Lifting the subsidy, the growing deficit of the budget, and lack of cash liquidity of foreign currency are all reasons that led to the inflation increase.
Mohamed Abou Basha, a macroeconomic analyst at EFG Hermes, said that he believes that the inflation rate is not the reason behind the stability of the Egyptian pound against the US dollar. He said that the decision to stabilise the pound against the dollar in the last tender of the Central Bank of Egypt (CBE) is due to the lack of adequate liquidity of the US dollar. The CBE should have a sufficient proportion of foreign exchange before floating the pound.
Abou Basha emphasised that the devaluation of the pound against the dollar has a great impact on the prices of basic commodities such as medicines. The pound devaluation contributed to the increase in the prices of food commodities, which is considered to be the index for measuring inflation rates. The imported food commodities ratio reached 40%, which proves how the sector is impacted on a large scale due to the devaluation of the Egyptian pound against the US dollar.
The annual inflation rate registered an increase of 13.9% during June, compared to June 2015, which was an unexpectedly huge ratio, according to Abou Basha.
The CBE should work on controlling the exchange prices that are now being controlled by the parallel market, he said, emphasising that the parties which control the exchange rate of the pound are the markets that have the greatest liquidity—the parallel markets.
Omar El-Shenety, CEO of Multiples Group, said that the depreciation of the pound against the US dollar is not the only reason behind the increase in prices. He pointed out that inflation in Egypt does not fully result from external factors, but rather that internal policies have increased the inflation rate dramatically.
The main internal factors that increased the inflation rate include subsidy reduction policies taken by the successive governments in the past years, he said. In addition to this, structural budget deficit—which drives the government to resort to printing money repeatedly—creates inflation by increasing the frequency of the pound in the market.
El-Shenety added that the third internal reason is the procedures taken by the CBE to put restrictions on imports to reduce their size. This led to a decline in the supply of a large segment of imported products in conjunction with the fixed demand. As a result, the prices of cars, drugs, and many raw materials increased.
Devaluating the pound against the US dollar is a traditional solution that no longer solves the problem. The CBE used to cut the pound by 10-15% in an attempt to control the exchange prices that contribute to inflation, according to El-Shenety.
He said that the government has carried out economic reforms such as lifting the subsidy and borrowing roughly $6bn to $8bn from the International Monetary Fund (IMF) to provide foreign currency liquidity that could help decrease inflation and resolve the US dollar problem.