IMF urges more monetary tightening in Egypt, Pakistan and Tunisia to stabilize inflation

01:28 PM

Wednesday, April 26, 2023

Books – Mustafa Eid:

The International Monetary Fund said that some countries in the Middle East and North Africa region need more monetary tightening (raising interest rates) to stabilize inflation, including Egypt, Pakistan and Tunisia.

This came within the framework of the second chapter of the Regional Economic Outlook report, which is expected to be issued by the fund on May 3, as the fund published this chapter of the report on its website, in a step prior to issuing the report in full.

The report said that central banks across the region have tightened monetary policy using a variety of tools, the most important of which is raising interest rates. But are these rates above or below the levels consistent with stable economic growth and inflation – that is, their “normal” levels, or do they need to rise further to stabilize inflation?

He mentioned that Egypt and Tunisia raised interest rates in line with their historical standards and lower than the index of emerging markets and developing countries, which indicates that they are less interactive with inflation developments than their other counterparts, most likely due to trade-offs in these countries between higher interest and debt sustainability.

The Central Bank of Egypt raised the interest rate by a total of 10% over the course of a year during 5 meetings, the first of which was on March 21, 2022, and the last of which was on March 30, during which the Central Bank raised the interest rate by 2%, to reach 18.25% for deposits and 19.25% for lending.

However, inflation rates in recent months have witnessed an upward pace to their highest levels in more than 5 years, and the annual general inflation rate during the month of March was 33.9% for the entire republic, compared to 32.9% in February, according to data from the Central Agency for Public Mobilization and Statistics.

The annual urban inflation rate reached 32.7% in March, compared to 31.9% in February.

While the annual rate of core inflation, issued by the Central Bank of Egypt, decreased to 39.5% last March, compared to 40.3% last February, when it reached its highest level in its history in Egypt.

Egypt has been witnessing a wave of inflationary pressures and rising prices for several months, due to the repercussions of the Ukrainian war and the rise in US and global interest on the local economy, in addition to the rise in global commodity prices for several months, in addition to the depreciation of the pound by about 50% against foreign currencies during the last 13 months.

The IMF said that inflation continued to rise in Egypt, Pakistan and Tunisia, which indicates the need for more increases in interest rates to stabilize inflation, noting that when the policy stance is relaxed and inflationary pressures persist, monetary policy tightening should be considered to stabilize the situation. Inflation and inflation expectations (for example, in Egypt, Pakistan and Tunisia).

The Egyptian government had agreed with the International Monetary Fund on an economic reform program for a period of 46 months, supported by financing from the Fund worth $3 billion in several tranches, and the Fund’s Executive Board approved the program last December.

However, the first review, which was supposed to start in the middle of last month, apparently depends on the government moving towards achieving progress in the program of selling assets to obtain foreign exchange inflows, in addition to continuing to adopt a flexible exchange rate regime, according to recent statements by some fund officials.

The fund’s demands for monetary tightening and interest hike seem to be somewhat different from the policy currently adopted by the Central Bank of Egypt, which sees a different view of the causes and methods of confronting the current high inflation in the country.

Hassan Abdullah, during the spring meetings of the International Monetary Fund and the World Bank, which were held earlier this month in Washington, DC, said that high interest rates could do little to contain inflation.

“We will not hesitate to do more, but we need to be very careful,” he said, explaining that the interest rate is not the only tool that Egypt has to deal with inflation.

He added that a large part of our inflation is imported, and a lot of it is due to supply problems, not only supply prices, but supply problems; Including the backlog that resulted from some of the previous regulations and this in itself is not and will not be addressed through interest rates.

The governor stated, “The Central Bank of Egypt does not and will not hesitate to use monetary policy to reach its inflation target.” And that “what has been accomplished today is huge and we are ready to do more. However, the whole issue must be looked at, not just monetary policy.”

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