Greedy merchants and importers have launched a campaign to justify the recent rise in commodity prices in the local market, economic analysts blared out this week in El Watan newspaper.
The rise in prices had no justification apart from the “greed of the private sector”, the coordinator of a programme called Invest in Egypt declared, according to other newspapers.
"You can't leave the management of the economy to a handful of opportunists to prey on the Egyptian citizen," El Watan cited anonymous "central bank sources" as saying.
Even the supplies minister, Khaled Hanafi, felt obliged while on Lamees Al Hadidi’s evening talk show on Sunday to reassure viewers he was trying to clamp down on merchants to prevent them from raising prices.
Not that there aren’t plenty of greedy merchants out there but, seriously, that is not what is causing inflation in Egypt.
The real culprit can be uncovered in a mundane mathematical equation that translates roughly as “if you print a lot of money, prices will rise”.
More precisely, the equation says that the level of prices equals growth in money supply minus growth in the amount of goods and services in the economy, as long as people spend their money at the same speed as usual.
In Egypt’s case, M2 money supply grew by 17 per cent in the year to the end of March. Since the economy grew by 4 to 5 per cent in the same period, this should translate into inflation of 12 to 13 per cent.
And indeed, inflation was 11.5 per cent in the year to the end of March, according to the state statistics agency Capmas.
Of course, one should bear in mind that collecting inflation and GDP data is tricky, even in the most sophisticated economies, and it can take a while for economic effects to work their way through the system.
M2, the most widely watched measure of money supply in Egypt, includes currency in circulation and time and saving deposits, both in local and foreign currency. It rose to 1.68 trillion Egyptian pounds (Dh808 billion) at the end of March from 1.44tn pounds at the end March 2014.
In other words, an extra 244bn pounds entered the economy in one year, and each of those new pounds changed hands more than once, running after a limited number of goods and services. Something had to give, and it was prices.
If you take M1, which includes only currency in circulation and demand deposits in the Egyptian currency, the growth has been even quicker, reaching 19.2 per cent in the year to the end of February, the latest figure available. This is worryingly fast, and indicates that inflation could get worse before it gets better.
The government seems to be allowing money supply to grow to help it finance a budget deficit that, in the financial year that will end on June 30, is officially supposed to be 10.4 per cent of GDP. But some analysts believe it will end up significantly higher.
The inflation that this new money creates also causes new headaches for the budget deficit itself because the government has fixed the price of a wide array of goods and services it has undertaken to provide to the public.
Every year, the government would have to raise the price of these goods – petrol, diesel, bread, etc – by 10 to 12 per cent just to keep its own costs neutral, and by even more if it wants to decrease the deficit.
It also creates problems elsewhere in the economy where the government regulates prices without allowing them to adjust to reflect the forces of inflation.
Because every government since that of Gamal Abdel Nasser – and probably before – has printed money to help finance the deficit, some prices have become obscenely out of kilter. One of the most extreme examples is luxury apartments downtown, some of whose rents were fixed in the 1940s, during the reign of King Farouk, at 4 or 5 pounds a month, where they remain until today.
One advantage of creating money, at least in the short term, is that the new pounds flooding the market give the illusion of more wealth, leading consumers to go out and spend.
But as inflation starts to rise, they catch on and cut back their buying. Businesses begin raising prices in anticipation of more inflation, causing the stimulus effect eventually to falter or even go into reverse.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
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