We recall that Egypt signed an economic reform program with the IMF about 3-years ago in a bid to salvage the economy from the throes of the economic and political crisis. The IMF program came with requirements to implement some reforms which included the introduction of value-added taxes, cuts to energy subsidies and a currency devaluation.
With the medium to long term gains overshadowing short-term pains, the country holistically implemented all the above policies. Today, the benefits of the program range from a decline in the unemployment rate which fell to 7.5% in Q2-19 (vs 12.6% in Q3-16, pre-IMF reforms) to slimmer budget deficits as well as a stronger Egyptian pound (+8.3% YTD).
At the start of the fiscal year in Jul-19, Egypt received the final tranche of loan from the IMF and announced a fresh round of subsidy removal which created some fears of an uptick in inflation. However, according to the Jul-19 inflation report released yesterday, consumer prices in the urban parts of Egypt slowed to its lowest in almost four years, to 8.7% from 9.4% in Jun-19. Also, the core inflation sub-index fell to 5.9% from 6.4% in Jun-19. The high base effect from the prior year drove this as well as the success of government efforts to contain food prices. Meanwhile, with inflation already within the Central Bank of Egypt’s target (9.0% +/-3ppts), we expect the Egyptian monetary policy committee to take a more accommodative stance as it gets ready to meet by the end of the month.