Dubai: The Egyptian government is facing an increasingly difficult set of economic circumstances that could raise inflationary pressures and lead to further social unrest, according to Standard & Poor’s Ratings Services.
A report from S&P titled ‘Reliance on Central Bank finance could raise inflationary pressures in Egypt’, points out that since the popular uprising of 2011, economic growth in the country has been weak and the Central Bank of Egypt (CBE) has seen a sharp drop in its foreign exchange reserves.
Domestic banks continue to be the main investor in government securities, but the government is increasingly resorting to greater financing from the CBE.
“We believe that the depreciating exchange rate, together with increasing central bank financing of the government, is likely to lift inflation in Egypt above already relatively high levels,” said Standard & Poor’s credit analyst Trevor Cullinan.
“In our view, strong inflation growth through an erosion of real incomes would reduce the already low standard of living for the majority of the population. It is also likely to add to the existing high levels of political discontent. This may further reduce the government’s willingness to implement measures to alleviate fiscal and external pressures, putting downward pressure on our sovereign ratings on Egypt.”
Inflation in Egypt is expected to climb to 10.9 per cent this year, the highest level since 2010, the International Monetary Fund (IMF) said on Tuesday, more than it expected in April.
“Inflation is expected to rise in Egypt, Jordan, Morocco, and Tunisia, reflecting recent and planned subsidy cuts and, in some cases, pressure from monetisation of fiscal deficits and supply shortages,” the IMF said in its regional outlook.
The Fund expected Egypt’s inflation of 8.2 per cent in 2013 in its half-yearly analysis of the world economy published last month.
In 2014, however, price pressures may be a bit lower than previously thought as the IMF cut the country’s consumer price growth prediction to 11.6 per cent from 13.7 per cent seen in April, the report showed.
The IMF did not change economic forecasts for other Middle East and North African oil importers and exporters in its new report, which closely follows the global outlook.
Egypt’s urban consumer inflation accelerated to 8.1 per cent in the year to April, fuelled by rising food and energy prices and a struggling pound currency.
It is expected to climb further as the government pushes through tax hikes and subsidy cuts to secure a $4.8 billion (Dh17.6 billion) loan from the IMF after two years of economic and political upheaval.
Negotiations with the IMF have stumbled repeatedly over government resistance to the austerity measures needed to get the fiscal deficit under control.
The IMF expects Egypt’s budget deficit to widen to 11.3 per cent of gross domestic product in the fiscal year, which ends in June, from 10.7 per cent in the previous year, but narrow again to 8.7 per cent in the fiscal 2013/14.
Egypt’s newly-appointed Investment Minister Yahya Hamed said earlier this month that the shortfall will be 11.5 per cent of GDP in the 2012/13 year.
With input from Reuters