Egypt risks exacerbating its record inflation and putting more pressure on the pound unless it slows the pace of an increase in the money supply that bankers and analysts say is being used to plug a widening budget deficit, according to Reuters.
Central Bank figures show that the “M1” money supply, which includes local currency in circulation and demand deposits in Egyptian pounds, jumped 31.9 percent in a year, until the end of May of 2023, after it increased by 23.1 percent in the fiscal year ending at the end of June of 2022. And 15.7 percent in the fiscal year, 2020/21.
Money supply growth has accelerated sharply over three years during which the fundamental weaknesses of the Egyptian economy were exposed after it was hit by a series of shocks, including the COVID-19 pandemic and the war in Ukraine.
The state’s public finances are also under pressure due to a persistent deficit in foreign currency and mounting debts that need to be refinanced or repaid, $20 billion of which is within the next twelve months.
Meanwhile, spending has skyrocketed as the country pursues massive infrastructure projects, including new cities and a major expansion of the road network, while trying to continue providing some support in light of declining living standards.
The Ministry of Finance expects that the budget deficit will reach 824.4 billion pounds ($26.7 billion) in the fiscal year 2023/2024, which began on the first of July, up from an estimated deficit of 723 billion pounds in 2023/2022, and 486.5 billion in 2022. / 2021.
The ministry’s data also shows that it expects total spending to rise to EGP 2.07 trillion this year, from EGP 1.81 trillion in 2022/23.
Analysts say that printing more pounds at a rapid pace leads to an increase in inflation and a weakening of the currency.
“In light of the limited ability to obtain external financing and the high exposure of the banking sector to government debt, failure to curb the budget deficit may lead to further financing of the deficit by increasing the money supply and exacerbating inflation and foreign exchange problems in Egypt,” Patrick Curran of Telemer told Reuters. .
Egypt’s central bank and finance ministry did not respond to Reuters requests for comment.
Inflation jumps
The rate of inflation in Egyptian cities accelerated to 35.7 percent in June, exceeding its previous record level, recorded in 2017, and compared to 30.6 percent in April, while core inflation also jumped to a record level, recording 41 percent.
Earlier this week, JPMorgan raised its forecast for the average inflation rate in the new fiscal year, which ends in June 2024, to 22.7 percent from 21.3 percent “as a result of continued (inflationary) pressures and because of foreign currency risks.” Core inflation is expected to average 23.5 percent.
The official exchange rate of the Egyptian pound has declined by half against the dollar since March 2022, and more than that on the black market. The currency futures market expects the pound to fall to 40 against the dollar over the next year from about 30 now.
A large part of the deficit in the Egyptian budget is due to the rise in interest rates on internal and external debt, which recorded a significant increase over the past eight years.
The interest bill worsened after the Federal Reserve (the US central bank) began raising interest rates in early 2022, and as investors avoided emerging market debt.
The Ministry of Finance expects that internal and external debt service payments will consume about 52.3 percent of its revenues in the fiscal year 2023/2024.
A $3 billion loan from the International Monetary Fund, over 46 months, is due to be disbursed after confirmation in December, but the first review of the program has been delayed amid uncertainty over Egypt’s pledge to move to a flexible exchange rate for its local currency and sell off state assets.
government borrowing
Bankers and analysts told Reuters the main way the central bank has increased the money supply is direct lending to the government, including buying government bonds.
This can be seen in what the Central Bank announced about net claims owed by the government, which jumped to 1.48 trillion pounds, by the end of May 2023, from 1.06 trillion pounds, by the end of June 2022, according to Central Bank data.
The interest bill on domestic debt could rise further after raising the overnight interest rate by 1,000 basis points since March 2022. The interest rate on one-year treasury bills jumped to 24.07% at the latest auction, on July 6, from 14.09% a year ago.
Over the past five months, credit rating agencies Moody’s, Standard & Poor’s and Fitch have downgraded Egypt’s sovereign debt rating. In May, Moody’s put Egypt under review for a possible further downgrade, attributing this to slow progress in asset sales.
Another downgrade from Moody’s would make Egypt’s rating drop from “B3” to “Caa” at least, indicating a “weak position and exposure to high credit risks.” Moody’s says such reviews normally take 90 days.
2023-07-14 19:28:50
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