Inflation has been surging in Egypt since Russia’s invasion of Ukraine in February 2022, and it shows little sign of abating, according to both experts and the forecasters on INFER. In fact, it’s probable that Egypt’s inflation problem will get worse.
Forecasting Egypt’s inflation rate
“The increase [in Egypt’s inflation rate] was driven by a rise in food prices, the impact of currency devaluation, and the effect of a raw material shortage,” INFER Pro Ian wrote in a forecast.
The headline year-over-year inflation rate was over 31% in February and INFER Pro forecasters are tackling the question of whether it will exceed 40% for any month between now and August 2023. Forecasters have noted that headline inflation has never exceeded 40% for any month since 2000, the earliest data available from the Central Bank of Egypt.
“A longer history of Egypt's inflation is showing several rises to 30%+ before, however, never breaching 40%,” wrote INFER Pro Ryan Beck.
However, the current INFER forecast suggests that this time is probably different because of the difficult economic conditions Egypt is facing. INFER Pro belikewater laid out the country’s precarious situation in a forecast in late April:
“The current economic situation is dire, and the recent dip in [month-over-month] inflation was most likely just temporary and perhaps related to Ramadan; there was a similar dip around the same time last year, too. Egypt's currency is collapsing, the country has dwindling FX reserves, and another currency devaluation may be around the corner. S&P also just lowered Egypt's credit outlook to negative. The IMF is willing to release more loans to Egypt if the country allows more exchange-rate flexibility - i.e., devaluation - and greater privatization of the economy; I suspect that negotiations with the IMF will likely be completed and any absolutely required changes enacted before the end of August, and probably substantially before, perhaps by June. The FX situation is especially bad for Egypt because the country imports more than 50% of its food, and food accounted for 20% of all Egyptian imports in 2021; Egypt is the largest wheat importer in the world. Food and drink also account for nearly 1/3 of the average Egyptian family's budget. Any further devaluation will increase inflation because it will cause food and other prices to increase.”
As of this writing, INFER forecasters predict a 72% chance that Egypt’s headline inflation rate exceeds 40% for at least one month between now and August. In other words, INFER forecasters think it’s probable that inflation will get considerably worse in the coming months.
Farouk Soussa, an economist at Goldman Sachs who covers Egypt, largely agrees with the INFER consensus. Goldman’s current forecast has Egypt’s headline inflation peaking at 35% in Q3, but in an interview with INFER, Soussa suggested the chance of a month over 40% could be as high as three-in-four. The key question, he believes, is whether there is another currency devaluation.
The future of the Egyptian pound
Egypt has had three currency devaluations within the last year and those have made imports more expensive—including food. But the Egyptian pound still has further to fall, says Soussa. And he thinks the path of inflation this year hinges on whether or not there’s another devaluation.
If there’s no devaluation between now and August, Soussa predicts that a month of 40% inflation or higher is less likely than not. However, he added “I’d say the chances of a devaluation over the course of the next several months is probably something like 70%.” And if there is a devaluation then the chance of a month of 40% inflation or higher is more like 90%. (Run the numbers on these scenarios and the chance of inflation exceeding 40% comes out very close to the INFER crowd consensus.)
“As a rule of thumb for every 10% devaluation that adds 3 or 4% to your inflation,” Soussa added.
One ray of positive news comes from food prices, which comprise a large share of the average Egyptian’s budget and which rose less than forecasted in March. However, as INFER’s belikewater noted, that might not be enough: “Inflation in Egypt is going to be a tough nut to crack, and I suspect it's going to get substantially worse before it gets better.”
This article is part of a new blog series called INFER Insights. Each post will explore a question (or group of questions) we're monitoring on INFER and compare the crowd consensus with expert perspectives surrounding the possible outcome.
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