Inflation may fluctuate, but its effects remain crippling

In some ways, the Tawfikia market in downtown Cairo captures a bit of the business landscape in Egypt: shops that once offered vegetables, fruits, meat, chicken, fish and dairy products have turned into outlets selling imported car accessories, mobile phones or fuul and taameyya sandwiches to employees in the surrounding government buildings.

Those who have held on to their original trade, like Ahmed Youssef, are to be found on the fringes of the market, struggling to sell to customers at a decent profit.

“Everything is expensive. You cannot go to the market and buy onions and tomatoes and green beans every day,” he says. As the breadwinner of his household, he earns a living by selling the same vegetables he now has to buy in moderation, as prices have increased over the past months.

His wife can only cook the traditional vegetable casserole once a week now, and she adds meat to the mix even more sparingly. Having a full meal like that every day is a luxury that exceeds what he is able to earn on a daily basis, says Youssef.

The Egyptian government has been attempting to find a balance between managing inflation and growing the economy, enacting this past July some contentious subsidy reforms while trying to keep prices of essential goods from soaring.

It has been an uneven path.

Annual inflation crept back up to 10.6 percent in February, after it had dropped in January to 9.7 percent from 10.1 percent in December. It had peaked at 11.8 percent in October.

A drop in global oil prices has helped cushion the blow of a package of subsidy reforms that initially sent prices surging, but plans to continue gradually trimming subsidies will likely keep the pressure on inflation and prices fluctuating.

Hany Tawfik, director of Egyptian Private Equity Association, points to the discrepancy between official inflation rates and the real ones, due to the fact that the basket of goods and services excludes a number of highly demanded food categories.

On the streets, people are obviously struggling, Tawfik says. At the market, this means that the now-limited food section will continue to see lower foot traffic and sales.

A few hundred kilometers away, the Red Sea city of Sharm el-Sheikh will host the Egypt Economic Development Conference this weekend, a large-scale summit that has been marketed as the answer to the country’s sluggish economy and negligible investor confidence.

It has been dubbed “Egypt the Future,” a sign of the heightened expectations many have for the conference to drive forth a direly needed recovery.

In a bid to lure potential investors, the government has been trying to address some issues that have been viewed as hampering their interest in the past. Key among these is a monetary policy that can be flexible in its response to changing inflation dynamics.

“In 2011-2013, domestic inflation rates remained generally subdued, compared to previous years, due to lower levels of economic growth, higher unemployment rates and lower global food prices. Despite this decline, Egypt’s average inflation remained higher than most of its trading partners and peer countries,” a blog  post running on the EEDC website explains.

In July, with the reform agenda in motion, price increases in fuel products and utilities led to higher inflation. However, as the blog post claims, “the increase remained generally below market expectations partly because of a preemptive policy intervention by the CBE which increased all key policy interest rates by 100 basis points in July 2014.”

“This swift response by the CBE helped anchor inflationary expectations, keeping actual inflation rates significantly lower than the levels initially anticipated,” it added.

In its first meeting of the year, the Central Bank of Egypt (CBE) made a surprise move to cut interest rates by 50 basis points, citing an ease in inflationary pressures. “Upside risks from imported inflation continue to be contained on the back of lower oil prices and the consequent revision in international food price forecasts,” the Monetary Policy Committee (MPC) said in a statement.

The following month, the MPC unexpectedly kept rates unchanged, though some analysts believed inflation had eased enough to warrant another rate cut in order to reverse the 100 point hike in July.

“Upside risks on the inflation outlook from domestic supply shocks are largely mitigated by contained imported inflation,” the February MPC statement read, once again citing the effects of lower oil prices.

Some experts say that an unclear strategy behind the CBE’s key decisions could make potential investors wary, which is exactly what the government is trying to avoid in the lead up to the EEDC.

“This sends a message that [the CBE] lacks a clear vision and is unable to decide on a fixed monetary policy,” says Tawfik. 

Providing advice to potential foreign investors has proved to be a difficult task, not only due to fluctuations in inflation and consequent monetary decisions, but also due to broader changes in laws and regulations related to investment and taxation.

Mohamed Khaled Abdelsalam, senior advisory partner at Moore Stephens Egypt, says that even if a country has an inflation rate of 45 percent, investors would still come in knowing what effect this could have on their projects.

“The real risk is that there is no clear vision on what we want,” Abdelsalam says.

The foreign investors he deals with are looking for a climate that guarantees fixed laws that are not amended regularly and on whims, a speedy judicial process that efficiently resolves disputes and a semblance of political stability, he adds.

These three factors seem to be wrapped in uncertainty. Executive regulations to the Income Tax Law have not been issued since amendments were made to the law this past July. Last week, the Cabinet ratified a new unified and controversial investment law. Meanwhile, Egypt’s Supreme Constitutional Court just postponed parliamentary elections after ruling the Constituency Division Law as unconstitutional.

In these respects, risk assessment becomes more unfeasible and highly unpredictable. “How can I provide advice when even I don’t know what articles will be implemented? I don’t know what’s coming,” Abdelsalam says.

While the government repeatedly affirms its commitment to improving the investment climate, challenges abound for policymakers trying to push for reforms while at the same time mitigating the added burden on citizens.

In a country with a massive number of fixed income earners and one of the highest civil servant population ratios in the world — 7.2 million people work for the government, according to World Bank figures — the falling price of the Egyptian pound, coupled with rising prices, hits hard.

Tawfik says the CBE’s policy of propping the pound over the past four years has had harmful side effects, but the inevitable devaluation as well as current inflationary trends may have some indirectly positive results: a somewhat forced revival of local industries, especially when it comes to textiles manufacturing and food industries.

The MPC attributed the 6.8 percent GDP growth in the first quarter of fiscal year 2014/15 in part to “continuous growth in the manufacturing sector.”

This has yet to resonate in Tawfikia, where Hajj Abdel Wareth says that a few years back, at the same time of the day, his produce would have been sold out. Now, he is sitting by his oranges, untouched and perfectly piled in a pyramid. 

Dina Salah ElDin 

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