Middle East monetary policy response to inflation undermined by many factors, experts say

Inflation in the Mena region is expected to surpass 10% for fourth consecutive year in 2023 on higher food prices and currency depreciations, according to IMF

A street market in Cairo. Egypt’s annual urban inflation rose last month to its highest level in six years. AFP

The Middle East and Central Asia region's monetary policy response to mounting inflation is “diverse” but its effectiveness has been weakened by various external factors, industry experts told an International Monetary Fund roundtable on Thursday.

Some of the factors that caused the feeble response include weak transmission channels, evolving monetary policy frameworks and lack of co-ordination with fiscal policy, they said.

“Inflation is there [in the region] for the third consecutive year … and the diversity among the economies has an impact on the way [monetary] policy measures were deployed and their impact on inflation,” said Jihad Azour, director of the IMF’s Middle East and Central Asia Department.

“Countries in the region started early but at different speeds and in certain cases they were also able to arrest inflation,” said Mr Azour, speaking at the session entitled “Challenges in monetary policy implementation amid turmoil in the Middle East and North Africa and Central Asia”.

“The impact of the measures largely depended on the nature of the monetary systems.”

Globally, inflation has continued rising due to steep increases in the prices of food and other commodities driven by the Ukraine conflict, which began a year ago.

The IMF expects global inflation to decline to 6.6 per cent in 2023, from 8.8 per cent last year. It is expected to fall further to 4.3 per cent next year.

According to the IMF, inflation in the Mena region is expected to surpass 10 per cent for the fourth consecutive year in 2023 on higher food prices and currency depreciations.

“There are still a number of countries that have double-digit inflation, and they need to keep using monetary policies in order to address this issue … they have to make sure their instrument and framework will reduce the risk of further inflation,” Mr Azour said.

He said central banks should be supported by fiscal policies and there should be policy co-ordination to ensure that addressing inflation is the top priority for countries.

Central banks around the world have increased their benchmark policy rates to curb inflation.

The US Federal Reserve has been aggressively raising rates, with more increases expected as it aims to bring inflation down from 40-year highs last year to its target range of 2 per cent.

The Fed increased the policy rate by 25 basis points last month, the ninth rate increase by the US central bank since it started monetary tightening in March 2022, pushing rates in the US to their highest since 2007, just before the 2008 financial crisis.

After surging last year, inflation in the Mena region is forecast to remain unchanged at about 15 per cent this year before declining modestly in 2024, Mr Azour said.

“There are certain oil-exporting countries, especially the GCC region, that have been able to keep inflation low … thanks to a certain number of measures that have been in place such as price control measures and subsidies … they have helped but they are not the best solutions,” he said.

Inflation in the GCC has been significantly lower than in most advanced and emerging countries, reaching an estimated 3.6 per cent on average in 2022, according to the IMF.

Inflation in Egypt, the Arab world's third largest economy, surged last year and remains high. The Central Bank of Egypt raised interest rates by 800 basis points last year and is likely to continue its monetary tightening this year.

Egypt’s annual urban inflation rose last month to its highest level in six years, mostly on the back of soaring food prices linked to the decline in the value of the local currency, the nation's state statistics agency Capmas said this week.

Inflation climbed to 32.7 per cent in March from 31.9 per cent the previous month, it said.

“The Central Bank of Egypt is determined to arrest inflation … we have been working on various models to control it,” Governor of Central Bank of Egypt Hassan Abdalla told the roundtable.

“Relaxing the supply [chain] issues and increasing competition could result in easing inflation as well as good co-ordination with the fiscal policies.

“We are working very hard and ready to do more to curb inflation.”