Consumer price inflation in Egyptian cities jumped on an annual basis to 8.8 percent in February, the highest in nearly 3 years, when it reached 9.4 percent in June 2019.
Public finances are expected to face further pressures in light of the rise in commodity prices. This and the possible decline in the number of Russian tourists as a result of the Russian-Ukrainian war, prompted American investment bank “JP Morgan” to announce that there is now a need to depreciate the Egyptian pound.
Inflation rose to 7.3 percent last January, according to data from the Central Agency for Public Mobilization and Statistics.
The recorded inflation was higher than the target set by the Central Bank of Egypt (7 percent) until the end of 2022.
Inflation in Egypt manifested itself after the state liberalized the exchange rate of the pound at the end of 2016.
The data showed that the consumer price index in the country recorded an increase of 2 percent in February compared to January.
The spokesman for the Egyptian Cabinet, Ambassador Nader Saad, said that the recent price increases are related to the Russian-Ukrainian crisis, which came following global inflation. He explained that the crisis between Russia and Ukraine exacerbated the price hike, especially with the increase that impacted all food commodities.
Pharos Securities Brokerage had revealed in a recent research note that if authorities do not lift bread subsidies in Egypt, a 9 percent inflation will be the most difficult reading in Q3, 2022. Whereas passing on to the consumers part of the prices increases of wheat globally and coupled with lifting subsidies on bread, may result in an inflation rate reaching 12 percent.
Wheat import costs
Because of the war in Ukraine, Egypt faces higher costs due to its dire need to import wheat, in addition to losing revenue from tourism from Russian and Ukrainian visitors to Red Sea resorts.
Despite this, the Egyptian government denied the existence of any impact of the crisis on the strategic reserve of wheat so far.
Will the Egyptian pound depreciate?
Analysts at the investment bank “JP Morgan” expected that the public finances of Egypt, which is already facing pressure, would suffer further damage in light of the rise in the prices of primary commodities and food and the possible decrease in the number of Russian tourists.
“JP Morgan” issued a report saying “there is a likelihood to lower the exchange rate,” estimating that the Egyptian pound is currently overvalued by more than 15 percent.
The American bank put forward several scenarios. The first is not to devalue the currency, a second would repeat the scenario between 2014-2015 when the authorities allowed the currency to depreciate about 5 percent, and the third is a larger devaluation within the framework of a new program with the IMF.
Chairman of Catalyst Partner, Maged Shawky, said that the scenario that expects the Egyptian economy to repeat the 2014-2015 scenario is “very unlikely.”
This scenario analysis resulted in a likely loss of 8.5 percent from the current value against the US dollar, as the target price is 17.25 Egyptian pounds to the dollar.
What the data says
Refinitiv data indicate that the price of the Egyptian currency recently reached 15.72 pounds to the dollar, about 10 percent lower than the target price of JP Morgan.
Recent data indicated that a number of investors sold about $1.19 billion in Egyptian treasury bonds in just three days, with activity continuing in the secondary market on March 8, according to “Reuters.”
According to a statement, the Egyptian Stock Exchange revealed that non-Egyptian investors sold treasury bonds worth 5.79 billion Egyptian pounds ($369.73 million), after they sold 7.79 billion pounds worth of bonds on March 7, and 5.10 billion pounds in transactions on March 6, according to the Reuters statement.
Bankers said that investors are reducing their positions in Egypt since the Ukraine invasion, reflecting fears of a large current account and budget deficit in Egypt, as well as exposure to the risks of a possible Federal Reserve hike. They say investors fear the value of their holdings will diminish if Egypt devalues its currency.