Egypt’s inflation to remain above central bank target in 2023
Al-Monitor Pro Members
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.
- Egypt’s year-on-year headline inflation hit a five-year high of 25.8% in January. The month-on-month increase, of 4.5% from December’s 21.3%, was also the fastest since January 2017.
- Core inflation, which does not include the most volatile items in the basket, such as food and oil, jumped to 31.2% in January, 6.8% above the rate of the previous month and the highest since September 2017.
- The primary driver of the latest increase were food costs, which rose in January 2023 by 48.1% year-on-year. The monthly increase of 10.2% was the sharpest in almost 20 years.
- However, the main underlying reasons for rising inflation in the country are the sharp devaluation of the Egyptian pound (EGP), import constraints due to a dollar shortage, and the general fallout from the war in Ukraine.
- Since March 2022, the Central Bank of Egypt (CBE) has allowed the pound to devalue and the currency has since lost about half of its value against the dollar.
- Since its last sharp drop on Jan. 11, the EGP has been more stable but has continued to slide gradually, hinting at a shift to a more flexible exchange rate. As of mid-February, the pound stood at 30.6 against the dollar.
- Despite Egypt’s thirst for hard currency, foreign inflows are only slowly starting to return after a massive capital flight in the first half of 2022, largely due to high inflation.
- High and rapidly rising inflation is also posing a major hurdle for Egypt’s non-oil economy, which has been in contractionary territory for more than 25 consecutive months, according to S&P Global Purchasing Managers Index (PMI).
- In the last two months, the non-oil private sector recorded sharp declines in output, new orders and new business, largely as a result of inflationary pressures and their effect on demand. Import restrictions have also led to further supply shortfalls.
- Non-oil private companies now anticipate a tough 2023, mainly due to a sustained dollar shortage, supply-related issues, and the effects of high inflation on demand.
- Inflation is impacting Egyptians’ purchasing power as well, with high percentages reporting changes in spending patterns and cuts in food, education and healthcare. A November report by the national statistics agency, CAPMAS, revealed that since the start of the Ukraine war 74% of households have reduced spending on food. A more detailed survey of poor and near-poor households by the International Food Policy Research Institute revealed that 85% reduced the consumption of meat, 75% of poultry and eggs, 61% of fish, and 43% reduced spending on healthcare and 25% on education.
- In the short term, prices will continue to rise pushed by a further drop in the pound, an expected hike in fuel and electricity prices that could be around 10%, the spike in consumption during Ramadan, which starts in late March, and dollar shortages.
- The high inflation rates recorded in the last two months will most likely force the CBE’s Monetary Policy Committee to adopt a more hawkish stance and raise interest rates at its next meeting, to be held on March 30 at the latest.
- In parallel, lower global food and fuel prices, which account for a very substantial share of Egypt’s consumer price index basket, and a reduction in consumption and investment due to a tighter monetary policy could also help tame rising inflation.
- An economic reform program tied to a $3 billion IMF loan to Egypt approved in December contemplates the possibility of inflation deviating from CBE targets as well as consultations in June 2023 to explore solutions if it climbs above 15% by then.
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.
The most likely scenario is that inflation will continue to rise in the coming months to peak above 30% by mid-year, well above the government’s target. It can also be expected to run high for the rest of 2023 and well into 2024, as Egypt tries to stabilize its financial position and its reform program starts to materialize. Still, if inflationary pressures stay well above the ceiling that the authorities are willing to tolerate for now, the CBE will intervene with a more hawkish stance, so inflation is unlikely to exceed previous levels by much either. Price stability remains CBE’s No. 1 priority, and in June it could activate the monetary policy consultation clause envisaged in the IMF deal and take exceptional measures to curb rising prices, especially if there is a perceived risk of social instability.
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).
We're glad you're interested in this memo.
Memos are one of several features available only to PRO Expert members. Become a member to read the full memos and get access to all exclusive PRO content.
Already a Member? Sign in
The Middle East's Best Newsletters
Join over 50,000 readers who access our journalists dedicated newsletters, covering the top political, security, business and tech issues across the region each week.
Delivered straight to your inbox.
Free newsletters available:
- The Takeaway & Week in Review
- Middle East Minute (AM)
- Daily Briefing (PM)
- Business & Tech Briefing
- Security Briefing
- Gulf Briefing
- Israel Briefing
- Palestine Briefing
- Turkey Briefing
- Iraq Briefing
Join the Middle East's most notable experts for premium memos, trend reports, live video Q&A, and intimate in-person events, each detailing exclusive insights on business and geopolitical trends shaping the region.
$25.00 / month
$31.00 / month
Memos - premium analytical writing: actionable insights on markets and geopolitics.
Live Video Q&A - Hear from our top journalists and regional experts.
Special Events - Intimate in-person events with business & political VIPs.
Trend Reports - Deep dive analysis on market updates.
All premium Industry Newsletters - Monitor the Middle East's most important industries. Prioritize your target industries for weekly review:
- Capital Markets & Private Equity
- Venture Capital & Startups
- Green Energy
- Supply Chain
- Sustainable Development
- Leading Edge Technology
- Oil & Gas
- Real Estate & Construction
We also offer team plans. Please send an email to firstname.lastname@example.org and we'll onboard your team.
Already a Member? Sign in