By Farah Atia
Egypt’s urban inflation accelerated to 8.1% in April compared to 7.6% in March as the government faces mounting pressure from the International Monetary Fund to lift fuel subsidies to secure a much-needed $4.8bn loan.
According to a report by the Finance Ministry, the rising prices of food and beverages, housing, water, electricity, clothing, footwear, furnishing and equipment were the root cause of the rise in inflation. The report linked the hike in inflation to the constant weakening of the Egyptian pound against other currencies, especially the US dollar, adding that the bottlenecks on the supply side and the disturbance in distribution channels – particularly for diesel fuel – are other factors contributing to the increase.
Egypt’s Central Bank decided to keep overnight deposit and lending rates unchanged at 9.75% and 10.75%, respectfully, during the Monetary Policy Committee’s meeting held earlier this month, a way of balancing the recovery of a slow economy with the risk of inflation.
The decision followed a previous one to raise overnight rates last month, a way to combat inflation by reducing borrowing power and cutting down spending.
“Raising interest rates is a classic way to fight inflation. It is supposed to discourage banks from lending and thereby reduce the amount of money out there. Less money, lower prices,” said Jennifer Bremer, professor of Practice in Public Policy and Chair of Public Policy and Administration Department at the American University in Cairo. She specified that the interest rates being raised are the ones charged to banks when they borrow short-term from the Central Bank, which makes lending more expensive for them, which in turn tends to raise interest rates for everyone.
According to Bremer, “central banks always have to balance between raising interest rates to control inflation and lowering them to promote economic growth (allowing more inflation along the way). This is what is meant by an expansionist monetary policy – letting the money supply rise and therefore hopefully raising demand. It is not easy to do, of course.”
“I can’t say why specifically they raised them or didn’t at a given time,” she said. “They are feeling their way through, which is tough, because the reaction to a raising or lowering of the rate is not instantaneous. They may have seen a sign that the economy was slowing down so it was time to pump more money.”
According to John W Salevurakis, associate professor of Economics at the American University in Cairo, there is an inverse relationship between interest rates and inflation. “Lower rates increase borrowing for either investment or consumption, and higher rates impose a bit of friction upon both activities,” he said.
He adds that while the Central Bank might argue domestic instability as a cause for the current economic crisis, the real problem is inflation. “Currently, given falling foreign currency reserves and the declining pound value, the bigger enemy is inflation,” he said.
“When the pound has been perceived as reaching its bottom, the expectation is likely that foreign investors sitting on the sidelines will move into Egypt and the economy will expand. Until that happens, inflation and growth stagnation is the bigger and more immediate enemy.”