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Abu Dhabi, UAEMonday 17 December 2018

Egypt inflation falls sharply as currency devaluation impact eases

Finance Minister El Garhy says inflation set to drop below 10 per cent in 2019

Egyptian inflation is forecast to fall below 10 per cent by 2019. Nariman El-Mofty / AP
Egyptian inflation is forecast to fall below 10 per cent by 2019. Nariman El-Mofty / AP

Egypt's inflation rate dropped sharply last month, suggesting the impact of the country's 2016 currency devaluation, which had stoked record gains in consumer prices, is starting to subside.

The North African country's urban consumer price index eased to 21.9 per cent in December from 26 per cent in November, according to Capmas, the country's statistics agency.

Finance Minister Amr El Garhy told Reuters that inflation is set to drop below 20 per cent in February, and is forecast to fall to 10-12 per cent by the end of the year. Inflation is forecast to fall below 10 per cent in 2019, he predicted.

"It's a better than good indication and puts us on a good path," said El Garhy.

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After Egypt devalued its currency in November 2016, the rate of inflation rose as high as 35 per cent. The impact of the devaluation was compounded by a reduction in energy subsidies, together with a looser monetary policy, which were required for the country to tap a $12 billion loan from the IMF.

Economists have been encouraged by steps the government has taken to put the economy on a sustainable path of growth, following years of decline in the wake of political chaos that has seen two uprisings that ended with the removal of two presidents.

The economic storm prompted by the country's political unrest depleted foreign exchange reserves, as the central bank artificially propped up the value of the Egyptian pound. This in turn lead to a shortage of hard currency needed for importing raw materials and machinery vital for the country.

"The drop in Egypt's inflation is in line with our expectations and largely reflects the high-base effect from the forex liberalization just over a year ago," said Bilal Khan, Dubai-based senior economist for the Middle East and North Africa and Pakistan at Standard Chartered.

"Yet, the latest data are also encouraging on a monthly level. If the trajectory is sustained, we think headline inflation could moderate to around 10 per cent before falling to the single digits by 2019. Nevertheless, we note that further subsidy cuts are needed to bring Egypt closer to cost recovery on a range of energy products - a key aspect of fiscal consolidation under the IMF program. This could put upward pressure on headline inflation later in the year."