As Egypt Prices Soar, El-Sisi Says Currency Is Undervaluedby and
Inflation accelerated to highest level in 8 years, data show
El-Sisi says Egypt had no other option but to float pound
Egyptian President Abdel-Fattah El-Sisi sought to shore up confidence in the pound on Thursday as inflation accelerated to the highest level in eight years following the central bank’s decision to abandon all currency controls.
The president said in a televised speech that the current exchange rate doesn’t reflect the true value of the pound. It would take a “few months” for balance to be restored in the markets, he said.
El-Sisi said the Nov. 3 decision to float the pound was one that could no longer be delayed. Prices have jumped since the move -- which along with a cut in fuel subsidies was key to securing a $12 billion loan from the International Monetary Fund. The remarks are part of an attempt to explain to a population of 92 million -- half of whom live near or below the poverty line -- the reasoning behind last month’s major policy steps.
The currency has weakened 50 percent since the float. Annual urban consumer inflation accelerated to 19.4 percent in November, from 13.6 percent in the previous month, according to official data released on Thursday. Core inflation, a central bank gauge that strips out volatile items, surged to 20.73 percent.
El-Sisi said authorities had made sure that basic goods were available at “reasonable prices for six months, at least” before deciding to float the currency. The pound’s “exchange rate of 17 or 18 per dollar is not its real price, and the balance will happen in a few months.”
Officials have sought to downplay the volatility in the exchange rate and have said the spike in consumer prices would abate. They have repeatedly promised that while the government would take steps to protect the poor from the impact of the reforms, cutting costs and revamping a bloated subsidy system were key to economic revival after more than five years of turmoil that ousted two presidents.
“We had no other option but to do what we’re doing now,” El-Sisi said on Thursday.
Some economists expect inflation to rise to 20 percent by the end of the year, and the latest figures support the predictions. The annual rate was the highest since November 2008, according to data compiled by Bloomberg.
November’s inflation surge was driven by an increase in food costs, data showed on Thursday.
The rise was expected, given the weaker pound and increasing transportation costs, said Reham ElDesoki, senior economist with Dubai-based Arqaam Capital. “This is not the end of it; inflation will go even higher in the coming few months.”
The pound now trades around 17.9 per dollar, 50 percent below its value before the central bank removed all restrictions on the exchange rate. The regulator also said it will cease defending the currency, a policy that cost Egypt billions of dollars since 2011.
Central Bank Governor Tarek Amer said the market was adapting to the new currency regime. The volatility in the exchange rate “is very good, it’s very healthy,” he said in an interview with the Enterprise newsletter published on Thursday.
Amer also said he expected investment inflows to Egypt to pick up and “automatically have a very positive impact on exchange levels” and inflation. Finance Minister Amr El-Garhy said last month that he expected inflation to ease to about 10 percent by mid-2017 as the budget deficit starts to narrow.
Net foreign reserves rose to the highest level in more than five years in November, as the country started receiving money from the IMF and global lenders. Amer has said he’s targeting $25 billion in reserves by year-end.