Experts alarmed by inflation rate

Ahmed A. Namatalla
4 Min Read

Minister hints November rate will be higher

CAIRO: Despite the continued positive macro-economic reports of the Ministry of Economic Development (MED), a double-digit inflation rate on the rise is causing alarm among economists and government officials alike.

Annual inflation reached 11.8 percent in October, up 2.2 percent from the previous month, according to the government s Central Agency for Mobilization and Statistics. On Monday, Minister of Finance Youssef Boutros Ghali hinted the yet to be released November figure could to be higher, saying he expects the inflation rate to continue to climb for the next few months.

Ghali s comments came on the sidelines of Dubai s Arab Strategy Forum, the same platform used by Prime Minister Ahmed Nazif to tell reporters of the difficulty the government faces in convincing Egyptians of the importance of convergence to a free economy. Nazif added Egypt has come a long way on the road to economic reform and will not let bureaucracy stand in the way of attracting investments.

But while the inflation rate is expected to continue to rise, economists point out the Central Bank (CB) cannot continue raising interest rates in response.

Shafik Gabr, Egyptian International Economic Forum president and Artoc Group chairman, says the rise in inflation was expected, considering increased foreign direct investment and the government s removal of subsidies, but raising interest rates will certainly curb economic growth.

What s very important is the ability of the government to deal with [rising inflation] in a manner that does not cause higher interest rates. Because if it does, it s going to impact growth, Gabr told The Daily Star Egypt. That s the dilemma the government s going to have to deal with: how to maintain economic growth and control inflation.

MED reported this week the economy grew at 7.1 percent in 1Q 2006-7, compared to 6.2 percent over the same period last year. Total investments reached LE 29.2 billion in 1Q 2006-7, with the private sector accounting for 60 percent of that figure, up from LE 22 billion last year. Meanwhile, FDI is expected to reach almost $8 billion this year, up from $6.1 billion in 2005-6, and foreign currency reserves are at an all-time high of $24.6 billion.

CB raised overnight deposit and lending rates in early November by 0.5 percent to 8.5 percent and 10.5 percent, respectively. CB Deputy Governor said the decision was made to counter the observed trends exerting pressures on the various price indices, or inflation. While the decision was applauded by some analysts, others said it was premature.

The stability in money supply and credit growth, the recent moderation of inflationary pressures (as shown by recent data), the high lending-deposit interest rate spread and an apparent government bias toward stimulating economic growth had led us to believe a general rise in interest rates was not warranted at this point, says EFG-Hermes analyst Reham El Desoki.

But while Gabr says he expects the inflation rate to continue climbing, he says the experience and momentum are in Ghali s favor to avoid an economic downturn.

I have faith in our Minister of Finance. Let me tell you, [managing inflation] is his best ability. That s his area of expertise. If he coordinates with the Central Bank Governor and the Minister of Investment, I think they could tightly manage it, says Gabr.

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