Devil's in the details, says Beltone Financial report

Sherine El Madany
6 Min Read

CAIRO: The economy will continue to grow but inflationary pressures will remain over the coming years, finds a recent report on Egypt by Belton Financial.

The macroeconomic report on Egypt – entitled “Egypt on Track, But the Devil is in the Details – finds that continuation of growth at “such historically high levels a challenging task amid rising inflation, limited effects of the reform process on employment growth and rising political consciousness.

The country will continue to witness robust GDP growth rates between 7.5-7.8 percent over the next two years, according to the report. However, inflationary pressures will remain on the horizon ranging between 6-8 percent in the absence of shocks and rising to at least 11 percent in the event of higher economic growth rates.

“We expect economic growth to continue, fueled by higher output in the services and manufacturing sectors [as well as] inflow of investments, the regional investment bank Beltone Financial stated in its latest report.

“Despite evidence of organic growth, we believe a continuation of higher growth rates.would be difficult in the absence of serious government commitment to implementing difficult reforms – such as restructuring of subsidies – as well as addressing longstanding impediments to doing business efficiently in Egypt, including bureaucracy, high business-related costs, access to land and lengthy judicial proceedings, read the report.

As economic growth elicits inflationary pressures, Beltone Financial forecasts that the inflation rate will fluctuate in the 6-11 percent range following events such as hikes in local and international prices of goods (particularly food and fuel), fiscal reforms, and cyclical factors.

According to the government statistics agency CAPMAS, higher food prices pushed Egypt s inflation rate up 10.5 percent in the year to January 2008, from 6.9 percent in the year to December 2007. CAPMAS said earlier this month that consumer prices throughout the country rose 11.5 percent in the year to January, compared with 7 percent to November.

“We do not expect that the government will be able to effectively predict inflation in the short term, but will rather be able to anticipate and respond to changes in inflation and its impact by increasing social expenditure to protect the low income population and reduce political noise, Beltone Financial explained.

“We believe the CBE [Central Bank of Egypt] could be inclined to raise its overnight lending rates and deposit facility interest rates by a maximum of 75 basis points over the course of 2008 and 2009 in the event of a significant hike in energy prices and the subsequent jump in inflation, with the magnitude and frequency of the hikes hinged on the pace of acceleration of growth-induced inflation.

The CBE raised this month its key overnight interest rates by 25 basis points – the first change in over a year – due to higher food prices and inflationary pressure from surging economic growth. The central bank now pays 9 percent on overnight deposits and lends overnight at 11 percent.

Beltone Financial expects the government to increase prices of diesel and gasoline in the second half of this year as part of its energy restructuring plan, which entails raising prices of natural gas and electricity for energy-intensive industry to their cost levels.

On the heels of this move, the price of mazot (fuel oil) doubled last January from LE 500 to LE 1,000 per ton. Despite public dismay, Minister of Finance Youssef Boutros Ghaly said Tuesday that subsidies on mazot would be totally removed. He added that the industrial sector could absorb the increase in cost without necessarily passing it on to consumers.

“Given that energy subsidies constitute over 70 percent.of total subsidies, we believe that restructuring of energy subsidies will continue on an annual basis to allow the government to redirect subsidies from high and middle income sectors to low income sectors, on one hand, and to redirect spending on energy subsidies to other subsidy items like food, transportation, health, education and low-income housing, on the other, read the report.

“Specifically, we expect annual increases in diesel and mazot are necessary and will continue until the end of the decade, with larger hikes in the price of diesel, given the high subsidy on it.

In line with Beltone Financial’s expectations, Shoura Council members discussed Tuesday proposals to raise vehicles registration fees to compensate for an increase in prices of gasoline and diesel.

“The government appears to be considering a scenario that would lead to its effectively removing the subsidy on energy products – including gasoline and diesel – without directly raising their sale prices.

“Under this scenario, the government would progressively raise registration fees on vehicles as a substitute for raising the sale prices of some energy products to avoid inflationary impacts, Beltone Financial commented on the proposal.

“It is still not clear, however, whether final implementation of the subsidy restructuring would take that course. Whatever the scenario [will be], we believe the government will continue with its subsidy restructuring program, especially on energy products, to redirect funds to finance the increase in prices of food products.

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