S&P Global Market Intelligence expected inflation in Egypt to accelerate further despite last July’s record of 36.5%, given the electricity tariff increase (which was supposed to happen in early July), and supply bottlenecks represented by import backlogs. , and the further weakening of the Egyptian pound.
“The upward pressure on wheat and rice prices as a result of Russia’s withdrawal from the Black Sea Grain Initiative and India’s decision to ban rice exports is likely to keep food inflation high,” London-based strategic analyst and economist Yasmine Ghazi wrote in a recent report.
Standard & Poor’s Global Market Intelligence expects headline inflation to peak near 39% year-on-year in October, ending the year at nearly 35% in 2023 and 20% in 2024. The report also forecast a depreciation of the Egyptian pound from 30.9%. per US dollar to 37.00 Egyptian pounds per dollar by the end of 2023.
The report indicated that further increases are warranted if Egypt is to move towards a monetary policy framework focused on gradually reducing inflation and moving to a flexible foreign exchange regime as defined in the IMF’s Extended Fund Facility (EFF) arrangement.
It also expected to raise interest rates by 200 basis points in the meetings of September (100 basis points) and November (100 basis points), respectively, to reach 21.25%, coinciding with a new cut in exchange rates likely in the period from September to October, when it is expected to complete IMF review at the same time.
This comes as S&P Global expected to raise interest rates by 500 basis points for the whole of 2023, of which 300 have been done. With the first review from the International Monetary Fund continuing, the research firm believes that progress on the IMF program will be important for the government.
And it is likely that its basic scenario will be achieved, if there is a significant improvement in the net reserves of the Central Bank of Egypt on the back of the strong tourism season and further progress in the government’s offering program, which raised (1.65 billion US dollars in foreign currency that was concluded in early July and aims to raising an additional billion dollars).
On the negative side of currency outlook, and inflation, the authorities could artificially keep the exchange rate stable/fixed until the end of 2023. This could happen if the progress in asset sales (other than debt flow) does not match the authorities’ expectations of maintaining the managed exchange rate system. In this case, the currency will be stronger than expectations assume, which will reduce inflationary pressure and allow the central bank to delay raising interest rates until late 2023 or even that it may keep rates suspended for the rest of 2023, according to what was seen by Al Arabiya.net.
As for the most dangerous scenario, the currency could weaken further, especially if the central bank floats the pound completely. Hence, the exchange rate is likely to exceed expectations of 37 pounds per US dollar until the end of 2023, leading to stronger inflationary pressure and forcing the central bank to tighten by 300 basis points, in a repeat of the December 2022 scenario).
