March 17, 2014
While economists might disagree on a sound measurement of stagflation in a given economy, they unanimously approve that combining high inflation with slow economic growth and rising unemployment results in a very unhealthy “cocktail” for any economy leading to serious social unrest and higher poverty rates. In Egypt, the economy had been sluggishly growing since the onset of political and social unrest in 2011. Quarterly real GDP growth rates declined steadily to reach a mere 1% in Q1 2013/14 (July-Sep) and is expected not to exceed 1.5% in Q2 2013/14 (Oct-Dec). Such economic underperformance resulted in higher numbers of unemployed people (+1.2 million unemployed since Dec 2010) especially among the youth, women and the educated. It is noteworthy that unemployment reached a high of 13.4% by end December 2013, compared to 8.9% in December 2010. One would have expected at least a deceleration in prices to be consistent with sluggish economic activity, and lower rates of job creation. However, annual Consumer Prices continued to record high rates reaching a peak of 13% in November 2013 before receding gradually to a still high rate of 9.8% in February 2014. This has been driven by chronic supply bottlenecks and lagged impact of a weaker Pound that cumulatively inflated prices of food and beverages to recoded a monthly average rate of 13% since January 2013 and to reach a peak of 19.1% in November 2013, the highest rate in more than 30 months. Cumulatively, prices of food and beverages increased by 43% since January 2011. Such mix of sluggish growth and higher prices can lead to further social unrest especially among the poor segments and the Youth.
If you were paying EGP 100 for a product/service in January 2011, how much are you paying for the same product/service today? Here’s the answer according to CAPMAS data:
Possible explanations for the significant increase in prices:
A weaker Pound: The continuous devaluation of the EGP/USD exchange rate had been fuelling higher prices of imported goods and components’ as well as higher inflationary expectations. Most traders, producers, and grocery shops anchor their prices to exchange rate movements, even if not directly affected.
Supply bottlenecks: including outdated, limited and inefficient transport, logistic, and storage Â infrastructure. This has been further augmented by disrupted production and supply shortages in light of deteriorated security conditions.
Resilient demand due to higher remittances inflows, higher public wages and salaries, and high and generous wide subsidies schemes .
Administrative price increases and/or higher taxes on certain products such as cigarettes and tobacco (annual increase in prices by 69.9%, 18.8%, and 7.7% in the years 2011, 2012, 2013 respectively). It is further expected to increase by at least 9% in 2014 year due to the latest administrative price increases in February 2014.
Higher energy and electricity prices especially price of energy products the industrial producers and tourism sector including hotels, cafes and restaurants.