Egypt's headline inflation rate dropped dramatically last month to 12.8 per cent, down from 24 per cent in January, as the country carries out several reforms amid efforts to stabilise its economy.
This significant decrease marks the lowest inflation level since March 2022, when Egypt was grappling with a crippling financial crisis.
Although the drop is a sign that a foreign currency crunch that plagued Egypt’s economy between 2022 and 2024 has slightly abated, experts told The National that the size of the decline was largely caused by favourable base effects.
“You’re comparing last month’s figures to figures from February of last year, which was a particularly bad month for the country’s economy," Karim El Omda, an economic analyst, told The National. Last year's figures represented "a more grim picture of the state of the economy … that makes this recent improvement look all the more impressive", he said.
Food and beverage prices, the largest single component of the inflation basket, climbed just 3.7 per cent in February compared to 20.8 per cent in January, according to the country's statistics agency, Capmas. On a monthly basis, consumer prices increased 1.4 per cent versus 1.5 per cent.
The slowing of the inflation rate on food items last month was a surprising development considering that it was right before the holy month of Ramadan, which is currently under way, as it is a time of increased food demand.
To offset high prices during Ramadan, Egypt’s government has since January been increasing supplies of foodstuff at government-organised markets and other government-sponsored outlets. The supply increase was also accompanied by a media campaign encouraging people to buy their Ramadan wares earlier to get them cheaper.
This has had the effect of “spreading out” the demand for food during the holy month over a longer period of time, according to Dr Moustafa Badrah, a professor of economics, who called it “an intelligent move on the government’s part”.
The latest drop in inflation was also the coming to fruition of a number of economic reforms that were largely driven by a series of bailouts that Egypt received from regional and international partners last year, most notably the $35 billion Ras El Hekma deal. That deal by the UAE saved Egypt from a disastrous foreign currency shortage that had brought its import-heavy economy to a near standstill.
The Ras El Hekma deal was followed by an increase in Egypt’s standing programme with the International Monetary Fund from $3 billion to $8 billion, which came with a set of economic measures.
The financing enabled the country to marginally drive up domestic production and steer through the economic downturns of the war in Gaza, which shrunk Egypt’s vital Suez Canal foreign exchange inflows by over 70 per cent in 2024, Dr Badrah said.
“The FX inflows also restored investor confidence in Egyptian markets and what we have seen over the past year is a remarkable rate of T-bill sales in foreign currency and increased stock market activity. But interest rates have to be cut before we can see the full capacity of the economy take shape,” he said.
“We mustn't forget that repairing inflation is the first step, the next step, which is more essential, is for the central bank to slash interest rates so that businesses can start spending again.”
It has been a year since Egypt’s central bank made any changes to its overnight rates. It last increased the rates by 600 basis points in March last year to qualify for the IMF programme. Since then, the overnight deposit rate has stood at 27.25 per cent and the overnight lending rate at 28.25 per cent.
“The latest drop [in the inflation rate] is an undeniable sign that the tight monetary policy which has been in place since last year is bearing fruit. At this rate, I expect the central bank to cut interest rates when the policy committee meets next month,” Dr El Omda said.
Local analyst Mohamed Ragab also anticipates the central bank to cut its rate by between 3 per cent to 5 per cent during the next meeting of the monetary policy committee.
However, Mr Badrah expects the central bank to hold rates steady until the new fiscal year in July.
“My prediction is that the IMF will request that rates remain high during its upcoming review of the country’s loan programme and they wouldn’t disburse the fourth tranche of $1.2 billion without getting the necessary assurances that the policy would remain tight,” Mr Badrah said.
Business owners in the country are keenly awaiting rate cuts to support more spending in the economy. However, for the average Egyptian consumer, cost of living expenses are unlikely to drop drastically anytime soon, analysts said. “When you’re saying that inflation dropped, it doesn’t mean prices dropped, it means they are getting expensive at a slower rate," Mr El Omda said.
Furthermore, Egypt’s Prime Minister Mostafa Madbouly said that, under the IMF programme, more subsidy cuts on bread, fuel, diesel, electricity and water would be implemented in the new fiscal year. He also confirmed that a round of salary increases would also come into effect with the new fiscal year.
“When more subsidies are cut on diesel and electricity, this will most likely drive inflation right back up before December. But what the government has assured is that no more significant price increases will be recorded before this fiscal year ends in June,” Mr Badrah said.
On the international front, the possibility that the war in Gaza would resume, despite the signing of a shaky ceasefire, continues to drive away Suez Canal traffic which threatens to undermine Egypt’s newfound FX security. Such a move would is likely to make the central bank hold its rates steady until it “sees what will happen”, according to Mr Ragab.
Another threat are the tariffs that the Trump administration has threatened to impose globally, according to Mr Badrah. "This could end up raising import prices for Egypt which, in turn, could cause another inflation problem," he said.
