According to a report by the Central Agency for Public Mobilization and Statistics (CAPMAS) on the annual inflation rate in Egyptian cities, the annual consumer price index increased in July from 36.2 percent to 38.2 percent on an annual basis. Despite the plethora of economic challenges confronting the Egyptian economy, the challenges related to monetary aspects have become the primary concern of Egyptians due to their direct impact on the real income rate of individuals and their standard of living.
This article reviews the main monetary-related challenges the Egyptian economy is currently facing, outlining the state’s adaptive mechanisms, and assessing their efficacy.
Obstacles to Monetary Policy
Since the start of the Russian-Ukrainian war and the acceleration of global inflationary waves, the Egyptian economy has faced severe challenges. The Egyptian economy was not the only one hit by the war; countries all over the globe felt its effects. The United States and Europe, for instance, implemented deflationary monetary policies, which were then adopted by a large number of other countries, particularly those that pegged their local currencies to the US dollar and countries where hot money was flowing out of their domestic economies in the direction of higher interest rates.
As a result of this crisis, the Egyptian economy now faces three significant monetary-related challenges: a foreign currency shortage crisis, a local currency depreciation, and a high rate of inflation.
On the one hand, the Egyptian economy, like other emerging economies, saw the withdrawal of nearly $20 billion in hot money in March 2022, and hot money continued to flow out during the first nine months of the fiscal year 2022–2023, with an estimated total of about $3.4 billion. Since March 2022, the Egyptian pound has lost approximately fifty percent of its value as a result of the foreign currency shortage crisis. The foreign currency shortage also exerted significant pressure on imports, leading to import restrictions. Furthermore, the lack of domestic supply and the rise in global prices both played a significant role in raising inflation rates.
According to the most recent data released by CAPMAS, the annual rate of inflation rose to 38.2 percent in July. Consequently, during the Monetary Policy Committee (MPC) meeting on 3 August, the Central Bank of Egypt (CBE) decided to increase the basic overnight interest rates by 100 basis points. According to CAPMAS, the annual increases of 68.4 percent and 52.3 percent in the food and non-alcoholic drink groups are what caused the inflation rate to rise. The CBE highlighted the effects of unfavorable weather and high temperatures, which exacerbated the expected seasonal effects on agricultural crops, particularly potatoes, onions, and citrus fruits. Figure 1 represents the annual rate of inflation across the country.
Figure 1: Egypt’s annual inflation rate (%)
With the exception of a slight increase in May 2023, monthly inflation rate data shows a decline in the inflation rate from February 2023 until last July, as shown in figure 2.
Figure 2: Egypt’s monthly inflation rate (%)
As inflationary pressures mounted and a foreign exchange crisis loomed, the CBE was forced to intervene in the currency market. As a result, the dollar’s exchange rate rose from around EGP 15.74 in March 2022 to around EGP 31 in August. This has caused a significant rise in domestic prices due to the abundance of imported goods. During the period between March 2022 and August 2023, the CBE increased interest rates by a total of 1,100 basis points (11 percent). However, it should be noted that the real interest rates are still negative due to the rising inflation rates, which has an impact on how appealing the various savings options the banking system provides are. On the other hand, high interest rates have a negative impact on the rate of direct private investment, which acts as a safety net in the event of crises brought on by supply shocks. Additionally, the ability of the interest rate tool to influence private credit is constrained by the high proportion of government credit, which accounts for nearly 70 percent of the total volume of bank credit.
Among the measures taken to attract foreign currency were the issuance of high-yield dollar certificates, whose returns are paid out in advance in Egyptian pounds, the exemption of gold brought in by expats from taxes, customs duties, and value-added tax, the tax-free car import initiative, and conscription settlement initiative for expats.
In December 2022, the Egyptian government turned to the International Monetary Fund (IMF) for additional funding. The IMF’s Executive Board granted $3 billion in funding, with the first tranche being disbursed. Due to the state’s delay in meeting the IMF’s requirements for implementing the initial public offering (IPO) program and liberalizing the exchange rate, the first review, which was originally scheduled to occur in March, was postponed and merged with the second review, which will occur in September.
Solutions to the Crisis
Globally, the past few months have witnessed a decline in commodity prices relative to anticipated rates. They are still above the target range, which raises the possibility that the Federal Reserve will continue its restrictive monetary policy. Regarding the Egyptian economy, it is anticipated that high waves of inflation will persist throughout the second half of 2023. Controlling imports and attempting to accelerate the growth rate of real economic activity by raising the contribution of productive sectors like agriculture, industry, and mining are advised in order to achieve the target inflation rate of 7 percent (± 2 percentage points). Forecasts suggest that GDP growth might be slower in 2022–2023 than it was in the previous fiscal year, which would increase pressure on price levels, particularly in light of the supply-side inflation crisis.
Perhaps the conclusion of the government’s agreements with the local and international private sector regarding the implementation of the government’s IPO program and the state’s exit from economic activity, will increase the CBE’s foreign currency reserves, thereby enhancing its capacity to contain the parallel market and control exchange rate fluctuations.
It is anticipated that these mechanisms, along with the continued improvement of tourism and transportation revenues, which recorded a noticeable improvement during the first nine months of fiscal year 2022-2023, will achieve market equilibrium, provide a variety of local commodities, and contribute to boosting employment and growth rates. This will aid in addressing the financial issues posed by the crisis of a lack of foreign currency, the depreciation of the local currency, and the high rate of inflation. That said, it should be noted that it is not just the responsibility of the monetary authorities to address these problems; rather, all state agencies must collaborate to emerge from this crisis.