Thursday, August 21, 2008

Egypt's Inflationary Pressures: Increasing With No End in Sight?

Egypt's inflation jumped to 22% in July o8; the highest rate in almost two decades on account of sky-rocketing food price rises which soared to 27% in May yoy from 16.8% in February, making economic reform less likely. Food prices make up 40% of CPI basket

Year-on-year inflation in urban areas was 22 percent for July while rural areas saw an increase of 24.3 percent (Reuters)

Food and beverage prices rose 3.1% in July from the month before, compared with 0.8% in June, and 3.6% a month earlier.

The accelerating inflation has promoted the government to cut customs duties on imported poultry, ban exports of cement and rice, increase food subsidies and authorize 18 million additional people to receive subsidized food (Bloomberg).

Inflation is expected to accelerate in the second half of 08 jumping to around 22% in Q4 08 with the average inflation expected to be 18.2% in fiscal year 08-09 (Bloomberg)

The central bank has also increased its overnight deposit and lending rates four times this year by a total of 2 points

Egypt has gradually been cutting energy subsidies because of their fiscal costs but the government fears political costs of rising food and energy prices. Several groups protesting for higher wages to meet costs

FT: Rising international commodity prices have increased subsidy costs. Govt allocated $14bn for food and fuel subsidies for 2008 with wheat bill expected to reach $2.67bn for 07-08

EIU: inflation undermining purchasing power and fueling general dissatisfaction and increase in protests. Building materials, especially steel and cement, have also seen sharp increases as government tried to lift prices

Since 1977/78 bread riots - triggered by an attempt to lift subsidies - the bread subsidy has been sacrosanct, despite the fact that it is not targeted

JP Morgan: Low earners have yet to feel the benefits of growth (7% average in recent years). Government plans to phase out subsidies by 2010 but Subsidy reform is proving difficult as protests grow in response to rising prices

FAO: Wheat policy is seen as an important component of the safety net for the poor. food security concerns and the fear of an excessive dependency on imports mean that the Egyptian government does continue to intervene in several markets, including the wheat market

Al-Ahram: the huge difference between the price of subsidized flour and its market price tempts some bakery owners to sell their quota on the black market for profit

Similar trends affecting other emerging markets. Water shortages will only rise in the middle east, reducing their arable land. This will have upward pressure on grain prices

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