Image Credit: Bruno Sanchez-Andrade Nuño
Globally, inflation rates have skyrocketed in recent months amid Russia’s invasion of Ukraine. In Egypt, inflation rates were as high as 13.5% on an annual basis. Although June’s inflation rates dropped to 13.2% from May’s high. While the average Egyptian citizen may not be celebrating such a minor improvement, tensions are certainly running high between them and their government.
While inflation rates are expected to stabilize to some degree in the next couple of months, the government’s pending deal with the International Monetary Fund (IMF) could force it to raise some commodity prices, which would directly impact inflation.
Egypt’s Central Bank raised interest rates by 200 basis points in May, declaring at the time that it would tolerate elevated inflation rates for the moment, but that is normally targeted rates between 5% and 9%. Maintaining “low and stable inflation over the medium term is a prerequisite condition to achieve high and sustainable growth rates,” the Monetary Policy Committee (MPC) the Central Bank of Egypt’s (CBE) policy arm said recently.
When Russia invaded Ukraine, inflation around the world began to press higher (than it would likely have gone otherwise), and with wheat and oil production impacted, it has increased financial pressure on many nations. These events and supply chain disruptions come on the heels of the COVID-19 pandemic, which shuttered many businesses for months around the world.
Many of the challenges Egypt’s government and the CBE are facing economically are occurring beyond the scope of monetary policy. In other words, while it’s important for a nation to have a sound monetary policy, external forces can and often do play a vital role in how the economy acts. According to the CBE in June, “Monetary policy tools are utilised to anchor inflation expectations, contain demand-side pressures and second-round effects emanating from supply shocks that may lead to deviations from inflation targets. Therefore, in accommodation of the first round of effects of supply shocks, the elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s pre-announced target of seven per cent (±2 percentage points) on average in 2022 Q4, before declining thereafter.”
While that’s all well and good as a statement, the Egyptian people are feeling pressure on a daily basis struggling to provide for their families and earn enough to live on. While the CBE professes a positive outlook for the end of this year and into next year, no one saw the events of this year coming, with or without the Russian invasion of Ukraine.
The CBE meets again on August 18 to determine whether it will raise interest rates again, it’s expected the U.S. Federal Reserve will boost its interest rates by 50 or 75 basis points in July. There is optimism in public statements, but wariness about a pending, deep recession coming in 2023. The IMF is expected to lower expectations for global economic growth for the ‘second time since the beginning of the Ukraine-Russia war.
What Does Egypt’s Reliance on the IMF Mean for the People?
Already, businesses throughout Egypt are noting reduced sales and almost half are citing increased expenses for them, which is helping to drive prices even higher. Now, there is some hope on the horizon, at least as far as Egyptian businesses are concerned.
For the past several months, the Egyptian government has decided not to raise prices on most commodities, despite 4-year high inflation numbers. That has been met with support among many people, yet due to having burned through all of its borrowed resources, it is turning toward the IMF to receive an infusion of cash. This deal doesn’t come without strings, though. Part of the expected deal will include having to raise at least some commodity prices to help absorb some of the impact of the cost to borrow.
The part of the Egypt economy that is non-oil based has struggled and will likely continue to struggle amid growing inflation which will eventually force the government to raise some commodity prices. With this increased pressure, it’s unclear how well the nation can withstand a global recession.
A significant part of the equation involves several factors that are beyond control. Including how long the war between Russia and Ukraine will last, what the U.S. Federal Reserve will do to combat inflation, which has a direct effect on the cost of borrowing for other nations around the world, and how high prices may climb (how long runaway inflation) endures.
On top of all these challenges, the Egyptian people are dealing with a government that is seeking to repress opposition, hoping to prevent a repeat of the 2011 Revolution which overthrew former President Mubarek. Oil sales have allowed President Abdel Fattah el-Sisi to bulk the military and has received $1.3 billion in military aid from the U.S. and $24 billion from several Middle Eastern nations, almost all of which have helped him expand Egypt’s military power.
Now, the military is considered a ‘god’ of sorts, with the power to deal with a wide range of civilian matters. If the deal with the IMF places more financial strain on the people, this could be a powder keg ready to ignite. But if this deal manages to curtail inflation and the country can re-establish its economic footing by next year, the people may overlook the government’s shortcomings, at least for a while longer.