CAIRO, Dec 27 (NNN-MENA) – In the past year, the Egyptian government has been striving to curb soaring inflation, caused by rising food and energy prices, as a result of the Russia-Ukraine conflict and lingering COVID-19 pandemic.
As the most populous Arab country and one of the world’s largest importers of wheat, Egypt’s economy has been particularly overshadowed by soaring global commodity prices, since the conflict’s breakout in Feb, 2022.
Under pressure, Egypt decided, in Oct, to sharply devalue its currency, the Egyptian pound, sending the annual urban consumer inflation rate surging to 18.7 percent in Nov, from 16.2 percent in Oct, marking a near-five-year high.
“The situation is difficult for Egypt, but it’s also difficult worldwide,” said Rashad Abdo, an Egyptian economist, citing recent protests in some European counties, due to high inflation and increasing cost of living.
Moreover, the Egyptian financial market suffered from a shortage of hard currency, that led to the decline in the local currency’s exchange rate against the U.S. dollar.
Rampant inflation in Egypt came, after two sharp devaluations of the Egyptian pound against the U.S. dollar this year, the latest of which was on Oct 27, when the Central Bank of Egypt (CBE) lowered the value of the pound by about 14.5 percent.
To contain soaring inflation, the CBE announced, on Dec 22, to raise the interest rate by 300 basis points.
“There are problems, but the government is working hard to address them,” Abdo said, noting that, the Egyptian government is taking measures to intervene in commodity prices on the market and expand the social safety network.
Egypt’s devaluation move was endorsed by the International Monetary Fund (IMF), which last week approved a three-billion-dollar loan, over the next 46 months as a support package.
Egypt relies on the IMF loan and offers international bonds “to narrow the finance gap related to foreign currency,” said Abdo, also head of the Egyptian Forum for Economic Studies.
“The government raised the interest rate to absorb the liquidity available on the market, and liberated the exchange rate against the U.S. dollar, to fluctuate with the market needs and under the guidance of the IMF for approving the three-billion-dollar loan,” he said.
The IMF loan approval, which enabled an immediate disbursement of about 347 million dollars to Egypt, is expected to catalyse additional financing of about 14 billion dollars from Egypt’s international and regional partners, the IMF revealed.
Fakhri al-Fiqi, an Egyptian professor of economics and head of the parliamentary Planning and Budget Committee, said, the IMF loan is “a certificate of confidence” in the Egyptian economy.
“The international business community has been waiting for this certificate of confidence, as the IMF will be evaluating and reviewing Egypt’s economic and structural reform programme biannually, for the coming four years,” the economist said.
Al-Fiqi explained that, the IMF support package, along with the anticipated 14 billion dollars from other partners, will make up for the hot money outflows, that led to the foreign currency shortage and eventually contain the inflation.
The IMF’s financial support was granted, in exchange for an economic reform programme, to be implemented by the Egyptian government, under which Egypt agrees to reduce the state’s footprint, facilitate private-sector-led growth, and more.
In a similar experience, Egypt carried out a three-year economic reform programme, that started in late 2016, in order to secure a 12-billion-dollar loan from the IMF.
With the fresh funding from the IMF, Egypt will be able to clear a backlog of requests from importers and businesses to access hard currency.
“With the expected foreign currency inflow, the Egyptian government will gradually clear the backlogs of importers’ requests and will provide facilitations to foreign exporters, which would help businessmen in Egypt import the materials needed for their factories,” Al-Fiqi said.
The IMF loan and the CBE’s decision to increase the interest rate will help gradually slow down the inflation rate over the coming four years to 4-5 percent as it used to be, which will be acceptable to average Egyptian citizens, the Egyptian economist said.
“When foreign currency is available at Egyptian banks to businessmen, the latter won’t resort to the black market, which will in turn stabilise the exchange rate and restrain the black market,” he added.– NNN-MENA
