Fitch forecasts 30% inflation, a peak driven by govt’s subsidy cuts

Inflation is set to pick up pace again and reach a high of 30 percent between July and September in  2024, according to a June report produced by Fitch Solutions of which Mada Masr obtained a copy.

Fitch bases its prediction of higher inflation on the government’s subsidy cuts, as well as the Egyptian pound’s weaker exchange rate.

The government has increased the prices of energy, electricity and bread subsidies over recent months in line with International Monetary Fund recommendations under its ongoing loan program.

Commenting on the subsidy drawback and the resulting inflation, Cairo University Statistics Professor and advisor to the state statistics agency Heba al-Leithy noted the harsh impact on the general public. Households are hit twice, she said, as they deal first with the commodity price increases resulting from subsidy cuts, and then with a secondary price increase which takes place as retailers experience increasing costs and pass them on to consumers. 

“Households will bear more cost, like someone who has a car will spend more,” she said. “But there is also an indirect effect which will increase the cost of the goods and services produced locally, therefore we have a double impact.” 

Amid the subsidy cut strategy, the BMI Egypt Consumer & Retail Report published by Fitch Solutions in June predicts that higher goods and services prices will raise month-on-month inflation, pushing inflation up to around 30 percent in 2024. It forecasts inflation will slow again to 18 to 20 percent in 2025.

Egyptians have weathered high inflation for the past two years amid an economic crisis, with rates reaching a record high of 38 percent in September 2023.

Annual inflation has slowed over recent months, however, reaching 25.2 percent in July, according to the latest data from the Central Agency for Public Mobilization and Statistics.

Fitch also predicts Consumer Price Inflation (CPI) to fall from a high of 33.9 percent in 2023 to 30.3 percent in 2024 due to sharp decreases in food prices.

CPI measures the monthly changes in prices paid by consumers, according to a representative basket of goods and services over time, and is a widely used measure of inflation. 

The Fitch report, however, notes that inflationary pressures will remain strong because of increases in the government’s “administered prices,” part of the government’s policy to reduce its subsidy bill. Fuel prices and the weak exchange rate of the Egyptian pound are to affect consumers the most. 

Prime Minister Mostafa Madbuly acknowledged the impact on the public in July, saying that in place of the subsidies, the government is preparing to increase the amount of cash support each family receives on a yearly basis “in order to cope with possible increases in commodity prices.” The roll-out of increased cash support is yet to be implemented, however.

The subsidy withdrawal policy increases the pressure on a large portion of Egypt’s population. Fitch noted that the majority of households nationwide are in rural areas with low overall incomes and an average disposable income of less than US$1,000 per year, making them more vulnerable to the impacts of inflation.

Food inflation will be the category most affected, the report says. In January 2024, food inflation grew by 71.5 percent year-on-year, compared to a 23.9 percent year-on-year growth in October 2022. 

Food inflation slowed over the following months, according to CAMPAS, but began to climb again in July, with 0.6 percent month-on-month increase compared to June, pushing July’s inflation to grow 28.6 percent year-on-year.

Fitch noted that the “persistently high prices,” namely in meat, poultry and wheat staples, which are essential to the Egyptian diet, continue to pressure household budgets.  

This is because most families will have to dedicate the largest portion of their spending to food and nonalcoholic beverages, according to the report, which estimates that food and beverages make up 35.2 percent of household spending, followed by 18 percent for housing and utilities and 6.1 percent for transport.

Fitch observed the impact of the government’s decision to increase the price of subsidized bread, a price hike of nearly 300 percent undertaken as part of President Abdel Fattah al-Sisi’s directives to alleviate the “burden” on the state budget. Given the importance of bread in the basket of goods taken into consideration in the CPI, Fitch estimated that the subsidized bread price hike contributed around an additional one percent to the CPI. 

Food prices in Egypt have also risen in line with inflation of global markets as the country continues to import the majority of its food, including cereals, meat and poultry. According to the report, the risk of imported inflation leads to the increased prices of imported goods for direct consumption, and indirectly leads to changes in the cost of imported goods, which is likely to direct consumers to trade down price points for goods where government subsidies are unavailable. 

The increase in the cost of these essentials will put more pressure on the disposable incomes of Egyptian consumers. Given the “elevated pricing” within the economy, the report said, namely essentials, Egyptian households are likely to experience financial strain over the current year. 

Leithy noted that aside from food, cuts to fuel subsidies will mean that transport fares will increase not only for citizens but also for shipping services of commodities, as well as the transportation of laborers, for example, compounding the effect of income on the population.

Fuel prices were hiked in July, followed by increases to  metro and train line fares by up to 15 percent and 25 percent, respectively. The decision represented the sixth hike in metro ticket prices over the past six years, with a 1900 percentage increase compared to fees before 2017.

Clothing and footwear also contributed to inflationary pressure, rising to 25.5 percent starting April 2024 from 20.4 percent in the same month of the previous year, transport costs rose to 23.6 percent in April 2024 from 17.2 percent the previous year and housing and utilities also saw increases to 10.1 percent, compared to 9.6 percent in same month of the previous year. 

Due to the increased prices of essentials and non-essential spending allocations, the report predicts households will shift away from non-essential spending over the coming four years. Spending will focus on essentials such as food and nonalcoholic beverages, housing and utilities, clothing and footwear along with transport and communication, allocating less funds to recreational and cultural activities, along with hotels and restaurants.

Over the same period, spending on essentials will account for two-thirds of household budgets, growing to 67.7 percent of overall spending in 2028, compared to 67.3 percent in 2024, Fitch predicts.

This will be driven by the erosion of real income across all brackets, “deteriorating consumer’s ability to purchase products” by causing them to allocate more of their budget to necessities, the report explains, noting that this is one of the most noticeable impacts of inflation.

Leithy also noted the implications for the general public of the increased cost of living caused by inflation. The poverty line is calculated by the minimum value of essential products and services that provide a decent standard of living, she explained, adding that if the value of these essential goods and services increases, the poverty line would also increase. 

“If purchasing power decreases,” said Leithy, “and given that we measure the living standard by people's ability to meet their basic needs, their ability to do this will also decrease, and that means that the poverty line will go up.” 

“This means that there are people with normal wages that are close to the poverty line who will fall under it, especially those with fixed incomes, or not necessarily fixed incomes but rather incomes that do not increase at the same pace as inflationary rates.”

Minimum wage for the public sector was increased to LE4,000-LE6,000 per month in February, with the private sector being directed to implement the same rate, but the failure of many public and private companies to do so has driven workers to  strike on multiple occasions over recent months.

The high level of household debt is another risk that will lead consumers to prioritize spending on essential categories, Fitch predicts, given the high interest rates decided by global central banks to curb inflation.

Fitch also expects interest rates to go down in the second half of 2024 if inflation continues to slow down.

In March, the Central Bank of Egypt hiked interest rates an unprecedented six percentage points following the Ras al-Hikma megadeal with the UAE, to try and curb inflation by withdrawing liquidity from the market. The measure was paired with a devaluation of the Egyptian pound, which dropped by around 60 percent in value to reach LE45 to the dollar 

Fitch predicts that the central bank will be “cautious” to ease its monetary policy in 2024 given that inflation rates remain above its target rate of five to nine percent, along with the “volatile nature” of the food component in Egypt.