Economically Festive

Niveen Wahish  

Thursday 30 Mar 2023

As they try to enjoy the spirit of Ramadan, Egyptians cannot help but keep an eye on the economy

The prices of pastries, always in demand in Ramadan to quench sweet cravings after a day of fasting, have reached unprecedented highs, to the extent that one high-end patisserie is offering to allow customers to pay in installments for their konafa, a Ramadan special. And it is not only pastries. The doubling of the price tag of almost every item on the table has been the topic of the evening during many Ramadan gatherings this year.

Yomna Abdel-Rehim, an upper middle-class divorced mother of two, says she now buys meat at government outlets where the price per kilo averages LE200, compared to more than LE300 in butchers. “How much higher can it go,” she asks. She knows that futures contracts have placed the value of the pound at LE40 per dollar, meaning there is no end in sight.

Charitable donations have also been squeezed by inflation. Ahmed Moussa, who organises daily Iftar and Sohour for workers on the grounds of the residential compound in which he lives, says the meals now cost around LE14,000 daily, double the amount last year. In the meantime, contributors have less money to spare.

Annual headline inflation reached 31.9 per cent in February 2023, up from 25.8 per cent the month before.

On 30 March, the Central Bank of Egypt’s (CBE) Monetary Policy Committee was due to meet to decide interest rates. HSBC forecasts that CBE will increase rates by three per cent. HC Securities expects a two per cent rate hike to stem inflation which it expects to peak at 35.9 per cent by July before slowly declining to 30.3 per cent by December. Higher inflation in March and the following months can be expected for a variety of reasons, says HC, including early March’s increase in fuel prices, the recent liberalisation of the price of essential food commodities like rice, the shortage in local poultry supplies due to problems with the price and availability of animal feed caused by the Russia-Ukraine war, and continuing devaluation of the pound.

Pressure on the pound has accelerated amid strong demand for the dollar to cover Ramadan import needs, says Mohamed Sedeek, managing director of Analytica Holding for Financial Investments. The pound has been slowly sliding since January. It is trading at almost LE31 to the dollar in banks, compared to LE25 to the dollar three months ago. And speculation is not making matters any easier. Instead of exchanging hard currency in banks, many people are selling it privately to family and friends who need it at a higher rate than banks are offering.  

The pound will continue to weaken as a result of the persistence of demand on the exchange market and continued speculative attacks on the currency, Ali Metwalli, economist and risk analyst at Infospectrum, a UK-based counterparty risk appraisal services company, told Al-Ahram Weekly. He expects the Central Bank of Egypt to continue to intervene in the market as necessary “to maintain stability and prevent excessive and unwarranted currency depreciation”.

Metwalli argues a hike in interest rates will be helpful because reduced demand will undercut inflation. It will not, however, lead to a fall in prices. Currency depreciation, along with global headwinds, including high global commodity prices, will keep prices high well into the second half of 2023, he warns.

Sedeek does not believe a rate hike is warranted. The purchasing power of Egyptians is has already dwindles, he says, and “most people are only buying necessities and, even then, they choose the cheapest options.” He cautions that any increase in interest rates will deter potential investments since it raises the cost of borrowing.

Hard currency inflows and confidence will gradually grow as the state moves ahead with its plans to sell stakes in 32 state-owned companies and increase the footprint of the private sector, Sedeekargues.

State-owned Paint and Chemicals Industries (Pachin) recently received two offers from local and Arab investors to acquire 100 percent of the company’s shares. Meanwhile, the offering process of two military-affiliated companies, Wataniya fuel stations and the National Company for Natural Water in Siwa (SAFI), began on 15 March.

AD Ports Group and Egyptian Red Sea Ports Authority also signed a concession agreement extending over 30 years to develop and operate a multi-purpose terminal at Safaga Port earlier this month.

The privatisation process is taking time because interested Gulf investors are looking for the best deals while Egypt wants the best valuation, explained Khaled Al-Sayed, managing director of Synerjies Centre for International and Strategic Studies. However, he stressed it was important to press ahead with the sales because hard currency is desperately needed, not least to cushion the Egyptian economy against any volatile fallout from the ongoing global banking crisis.

As well as selling stakes in state-owned companies, the government is seeking to encourage new investment in other ways. Tax incentives are important to lure investors, especially given the tough competition from Saudi and the UAE, yet even though the golden licence was developed to make life easier for investors its provisions have been badly communicated and few know what incentives it offers, says Al-Sayed.

Sedeek recommends that banks be more aggressive with their lending in order to kick start investment. Rather than park deposits in safe treasury bills he argues they need to take more risks and fund new projects, or projects that are expanding.

Looking ahead, Metwalli expects Egypt’s economy to grow by about 3.2 per cent in 2023 — the Ministry of Finance has marked in a GDP growth rate of five per cent for fiscal year 2023-24 — driven mainly by investment and export growth. Lower capital spending and weaker consumption growth will likely weigh on the outlook, he warns, and inflation is unlikely to return to single-digit figures before the second half of 2024 given the latest currency depreciations and ongoing high global commodity prices.

“Less reliance on imports and more manufacturing incentives could improve the currency outlook, but it is a gradual process,” he says.

And while investments from Gulf countries remain crucial to supporting the Egyptian economy during such a challenging period, the recent $7 billion deal with the World Bank under the five-year new Country Partnership Framework, and the support of the International Monetary Fund, will both help bolster economic resilience.

Egypt is due anytime for the first review of its economic reform programme by the International Monetary Fund (IMF), which approved a 46-month $3 billion extended fund facility loan last December.

* A version of this article appears in print in the 30 March, 2023 edition of Al-Ahram Weekly