Egypt inflation rise deepens challenge for cabinet

CAIRO: Inflation in Egypt's faltering economy accelerated in November, putting pressure on the new government to help millions of poor whose living costs were pushed up by supply chain failures even as incomes have been stagnating.

Urban consumer prices climbed 9.1 percent in the 12 months to November, up from 7.1 percent in October, the state statistics agency said. Core inflation, which excludes volatile items, slowed from a year earlier but grew on a monthly basis.

"Rising inflation in such a weak growth environment is a concern," said HSBC Middle East economist Liz Martins.

Egypt's economy is likely to have grown 0.5 percent in the third calendar quarter, but the situation has worsened since then, Capital Economics said in its latest research note.

"Interest rates have been hiked to support the currency, while the combination of protests and strikes are likely to have disrupted business," it said. "As a result, we would not be surprised if fourth-quarter GDP data are much weaker."

The relentless price growth makes grim reading for a new army-backed government sworn in last week.

Prime Minister Kamal al-Ganzouri faces the twin challenges of tumbling foreign reserves and a budget crunch that has pushed some government short-term borrowing rates above 15 percent, a record level that analysts say cannot be sustained.

The central bank unexpectedly raised benchmark lending and deposit rates for the first time in more than two years last month. It blamed upside inflation risks linked to supply bottlenecks and distribution channel distortions.

Economists said the bank was faced with little choice but a rate rise to ease pressure on the local pound currency. Since then, the pound has plumbed fresh seven-year lows against the dollar.

Foreign reserves were $20.2 billion last month, down from $36 billion in December 2010.

The previous interim government of Essam Sharaf struggled with political turmoil and social unrest, and resigned during protests last month in the run-up to a parliamentary vote.

Fears of worsening violence have abated since the start of the staggered election passed off smoothly.

Central bank Governor Farouk el-Okdah said at the weekend that reserves would rise in coming months because the new government is making security a top priority, and that would have a direct influence on tourism and foreign investment.

"The value of foreign currency in the central bank will witness an increase in the coming few months in view of its direct correlation to tourism and foreign investment and the correlation of all of this to the security situation," he said.

The new government was putting security at the top of its concerns, Okdah added.

Foreign investors are still loath to return unless the government shows it can draw funds to stave off a budget crunch.

Sharaf's cabinet negotiated a $3.2 billion facility with the International Monetary Fund earlier this year, only to turn it down in the summer. Since then Egyptian officials have sent conflicting messages about whether they still wants the funds.

"The resignation of the government just before the election has cast further doubt on the timing of any IMF funds being disbursed, if indeed they materialise at all," said Martins.

Annual core inflation was 7.04 percent in November, slowing from 7.6 percent in October, the central bank said. It grew by 1.0 percent month on month. Core inflation strips out subsidised goods and volatile items including fruit and vegetables. (Additional reporting by Patrick Werr; Editing by David Hulmes)





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