Inflation to hamper Egypt economic growth

GROWTH HAMPERED: Analysts said it is unlikely Egypt will hit its 7 percent economic growth target for the current fiscal year. (Getty Images)

Record-high inflation is likely to hit private consumption in Egypt in the current fiscal year, dragging real economic growth below the government's target of more than 7 percent, a poll by newswire Reuters found.

Interviews with 11 economists between July 16-22 showed that real gross domestic product (GDP) is expected to grow between 4.8 and 6.8 percent in the 2008/2009 fiscal year, which started on July 1.

Nine economists also said they expected the exchange rate of the Egyptian pound to range between 5.15 and 5.30 against the US dollar by the end of 2008. One economist predicted that the pound will depreciate from its current level. The Egyptian currency closed at 5.31 to the greenback on Monday.

Buoyed by rising foreign direct investment, the government has said real GDP should expand at a fraction over 7 percent during the fiscal year that ended on June 30.

The economy grew at an annualised rate of 7.5 percent in the January-March quarter of 2008, compared with 8.1 percent in the October-December quarter of 2007.

Cabinet spokesman Magdy Rady said last week the government aimed for growth to exceed 7 percent. "This is what we are working to achieve," he said.

Economist Mohamed Abu Basha, however, said a slowdown in private consumption growth in the first quarter of 2008 to 2 percent from 6 percent in the previous quarter was likely to hurt economic growth.

"Inflation is eroding the growth of private consumption," said Abu Basha, whose EFG-Hermes investment bank has recently downgraded their forecast for GDP growth in the current fiscal year to 6.2 percent from 6.6 percent.

"Inflation will remain high in 2008 and the monetary policy tightening will have an impact on private consumption."

Rising food prices drove urban inflation to 20.2 percent in the year to June, from 19.7 percent a month earlier, piling pressure on the government, which has faced a wave of violent protest against price rises in some parts of the country.

The central bank has nudged its key short-term interest rates higher four times this year in an attempt to bring inflation down. It said it would not hesitate to raise borrowing costs further to ensure price stability.

Ania Thiemann, senior Middle East and North Africa analyst at the Economist Intelligence Unit, said she expected real GDP growth to ease to 6.7 percent from an estimated 7.1 percent in 2007/08 as investment and private consumption slow.

"With the turmoil in international financial markets the cost of capital is rising, and even though a lot of investments in Egypt are boosted by the high liquidity in the Gulf, I can't see that continuing," she said.

Analysts have said one of the ways for the central bank to curb imported inflation was to boost the Egyptian pound's exchange rate against the dollar. The pound has gained about 7.5 percent against the dollar since the beginning of 2007.

The Egyptian government will spend nearly 80 billion pounds this year on subsidies, which include food and fuel. Egypt is also one of the world's leading wheat importers.

Abu Basha of EFG-Hermes said he expected the pound to rise further and end the year to hit 5.20 against the greenback.

"It will be the dollar weakening rather than the Egyptian pound strengthening," he said. "The fundamentals of the pound will not be strong enough."

But Dorothee Gasser-Chateauvieux, a senior economist at ING bank in London, said the Egyptian currency was likely to end the year at 5.55 pounds to the dollar to help exports at a time when the US and the Eurozone economies are weakening.

She said real GDP growth was likely to be at 4.8 percent in the 2008/09 fiscal year, dragged down by high inflation and "the rapid deterioration of the external account component of GDP". (Reuters)

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