Food prices drive latest hike in Egyptian inflation

Mahmoud Elkhwas/NurPhoto

• Headline inflation hit 32.7 percent in March, the statistics agency said
• Egypt’s currency crisis also continues to push up costs
• Central Bank of Egypt expected to raise interest rates again

Egypt’s inflation hit some of the highest levels on record in March, the state statistics agency Capmas said on Monday.

Year-on-year headline inflation increased to 32.7 percent while core inflation, which strips out energy and some food prices, slipped from an all-time high of 40.3 percent in February to 39.5 percent in March.

The month-on-month figures for March were slightly lower than in the previous month, with headline inflation at 2.7 percent and core inflation at 2.5 percent.

Food prices rose by nearly 5 percent.

Mohamed Abu Basha, head of macroeconomic analysis at EFG-Hermes in Cairo, said this increase was lower than the food price hikes seen in January and February, but is above historical trends. “It’s not that things are cooling off completely but that the last two months were too high,” Abu Basha told AGBI.  

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Egypt’s inflation rate has been surging since March 2022, spurred by the first in a series of currency devaluations and a prolonged shortage in foreign currency. Over the past year, the Egyptian pound has lost almost half its value against the US dollar.

Experts had predicted that March would be a record-breaking month for inflation. A Reuters poll of 13 analysts predicted headline inflation increasing to 33.6 percent, topping the all-time high of 33.0 percent set in July 2017.

The analysts cited the latent effects of currency devaluation, which has caused fuel prices to increase, as a reason for thinking that inflation would continue to grow year-on-year.

Monday’s announcement came shortly after the Central Bank of Egypt decided to increase interest rates by 200 basis points on March 30. The bank increased its overnight deposit rate and lending rate to 18.25 percent and 19.25 percent respectively. Many analysts expect rates to rise further.

“We might need more,” Abu Basha said. “Definitely with food inflation running at an all-time high means that the bank has to respond.”

Despite businesses reporting difficulty in accessing foreign currency, the bank’s FX reserves increased slightly from $34.35 billion to $34.447 billion, the highest since May 2022.

“In the short term it’s good to see reserves on the rise … but long term, Egypt needs more inflows than what it’s getting right now to pay its debt and foreign exchange needs,” Abu Basha said.

The International Monetary Fund has said that plans are underway for a first review of Egypt’s reform programme, following the $3 billion deal approved in December. Dates for the review mission have yet to be announced.

To qualify for the loan, Egypt agreed to move towards a more flexible exchange rate and reduce the state’s footprint in the economy. 

There are also signs that Egypt’s long-running financial backers in the Gulf are putting pressure on Cairo to accelerate the reforms outlined by the IMF. A visit by President Abdel Fattah Al Sisi to Riyadh last week resulted in no immediate funding promises.

A Wall Street Journal report cited unnamed officials saying that Gulf support for Egypt depended on Cairo devaluing its currency and appointing new officials to run its economy.