Egypt’s inflation to remain above central bank target in 2023

Al-Monitor Pro Members

Marc Español 

Freelance journalist covering Egypt and Sudan 

Feb. 23, 2023

Inflation in Egypt hit a five-year high of 25.8% in January, largely driven by the sharp devaluation of the local currency and constraints on imports amid a dollar shortage. The impact on the purchasing power of Egyptians and the private sector, which has remained in contractionary territory for more than 24 months in a row, has been severe. In the coming months, prices will continue to rise above the Central Bank of Egypt’s targets, leaving authorities with the tricky task of bringing them under control in the second half of 2023.

Scenario 1: Inflation overshoots expectations and remains out of government control

The pace of inflation rise in January was already well above what most analysts predicted, and even jumped two points higher than the average forecast of a Reuters poll. This has also been the case with the devaluation of the pound, which has fallen well below even the most pessimistic projections made in October and is now the main driver of inflation.

One of the main tools at the hands of the CBE to try to curb rising prices are new interest rate hikes, but the measure’s effectiveness is limited in a context where rising demand is not one of the main drivers of inflation. The government’s structural reform program has not taken off as yet either, it is not clear if its scope and the pace at which it will be rolled out will meet the high expectations it has raised, and it will take time in any case.

There are also several external risks that threaten to maintain strong inflationary pressures in the short and medium term. These include greater exchange rate misalignment, difficulties in managing the effects of the pass-through to higher exchange rate flexibility, limited external market access, and rising energy and food prices due to supply shocks.

Scenario 2: Government measures and favorable external context bring inflation down to CBE target

Egyptian authorities already anticipated that inflation would remain high in the near term, so their aim is to keep inflation expectations well-anchored over the medium term. And one of the main targets of the economic program agreed with the IMF is the adoption of a monetary policy directed at gradually reducing inflation.

The latest government projections are for the inflation rate to start cooling down in the second half of 2023 to between 7-9% by the end of the year; while the CBE is targeting 5-9% by the fourth quarter of 2024. The IMF’s latest forecast was that by next June inflation would already stand at 14.8% and that average for FY2023/2024 would come in at 11.1%.

Among the measures Egypt intends to adopt for now to try to contain inflation and reach these targets are raising interest rates, curbing spending on national projects, and improving monetary policy transmission mechanisms, including transitioning away from subsidized lending schemes. The authorities are also relying on the external context, especially fuel and food prices as well as the return of foreign inflows, to be favorable.

Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).