Egypt’s core inflation rate climbed to its highest level in seven years in June, underscoring the challenges confronting the government as it grapples with a foreign-currency crunch.
Annual core inflation, which excludes volatile items such as food, reached 12.3% in June, up from 12.23% in May and the highest since February 2009, according to the Central Bank of Egypt (CBE) website.
Headline inflation increased to 13.97% from 12.30% in May, a climb the regulator attributed to the unfavourable base effect from the previous year. Food and beverage prices climbed 33.64% year-on-year, reflecting typical rises during the holy month of Ramadan.
Egypt’s inflation is not all imported, says Eman Negm, an economist at Prime Holding, adding that the increase in pharmaceutical prices in May accounts for approximately 31% of the inflation rate.
Negm said that imported-inflation accounts for 50% of the rate because of the foreign-currency crunch. The other half is domestic inflation, she added, expecting that the rate will not fall in the next month due to the new school year as people will need to buy new clothes and other items. She predicts that the rate is expected to record 11.5% by next year.
The CBE’s 13% devaluation in March failed to make the Egyptian pound more attractive, Negm said, adding that greater devaluation will not have positive effects but rather will just create more inflation; therefore, it seems unlikely to happen soon. CBE Governor Tarek Amer cannot do anything to control the inflation through monetary policy now, she noted.
Negm said that applying value-added tax (VAT) should not raise inflation theoretically; she explained the tax’s purpose is to reduce the burden, not to raise it.
The government must control the local markets to prevent a greater increase in prices, she emphasised.
Aliaa Mamdouh, a former economist at CI Capital investment bank said that applying VAT would raise the inflation rate by 1-1.5%. The government is likely to establish this by the winter since it cannot be established now due to the high rate of inflation, she noted.
Mamdouh added that the inflation rate would not fall unless the government provides more reforms to the economic climate by supporting the industry sector, increasing exports, and reducing unemployment rates.