Egypt's Inflation Expected to Decline Amid Economic Reforms

Egypt, the most populous nation in the Arab world, is anticipated to experience a decline in inflation for the sixth consecutive month in August 2024. This forecast comes despite recent government-led price increases, highlighting the complex economic landscape of one of the Middle East's largest economies.

According to a survey of 19 analysts, the median projection for annual urban consumer inflation in August is 25.1%, down from 25.7% in July. This decline is primarily attributed to a favorable base effect, reflecting the country's ongoing efforts to stabilize its economy since implementing reforms in 2016.

Heba Mounir of HC Securities stated, "We expect urban inflation to decelerate to 24.9% y-o-y for August on a favourable base effect. However, we anticipate a 1.0% m-o-m increase on the recent energy and transportation cost hikes at the beginning of August."

The Egyptian government has been implementing a series of economic measures, including raising prices of subsidized products, to address a significant budget deficit. In the fiscal year ending June 30, 2024, the deficit reached 505 billion Egyptian pounds ($10.3 billion). These actions are part of the country's commitment to an $8 billion financial support package signed with the International Monetary Fund (IMF) in March 2024.

While the IMF support is helping Egypt control inflationary monetary policy, it has also necessitated increases in domestic prices. Recent hikes include:

• 10-15% increase in fuel prices in late July
• 25-33% jump in metro ticket prices in early August
• 21-31% rise in electricity tariffs, partially implemented in August

These price adjustments, coupled with higher summer produce costs, are expected to contribute to a month-on-month inflation increase. Naeem Holding forecasts a 1.24% month-on-month rise from July to August.

It's worth noting that Egypt's economy has shown resilience in the face of challenges. The country's informal economy, estimated to account for a significant portion of its GDP, has played a role in cushioning economic shocks. Additionally, Egypt has been diversifying its economy, investing in renewable energy projects and promoting its tourism sector, which has faced difficulties due to political instability and security concerns in recent years.

The gradual decline in inflation from the record high of 38.0% in September 2023 has had positive effects on the country's financial landscape. In July 2024, Egypt's benchmark real interest rates turned positive for the first time since January 2022, marking a significant milestone in the country's economic recovery efforts.

As Egypt continues to navigate its economic challenges, the government has been implementing a comprehensive social protection program to mitigate the impact of reforms on vulnerable populations. The country has also been working on digitizing government services to improve efficiency and reduce corruption, demonstrating a commitment to long-term economic stability and growth.

The state statistics agency CAPMAS is scheduled to release the official August inflation data on Tuesday, September 10, 2024, which will provide a clearer picture of Egypt's current economic situation and the effectiveness of its ongoing reform efforts.