The complex fallout of the Russia-Ukraine crisis has had a huge impact on global markets, disrupting supply chains and causing inflationary pressures that resulted in substantial price increases in basic commodities and shipping costs. Almost simultaneously, the US Federal Reserve decided to raise interest rates, and adopt a deflationary policy. As an emerging market, Egypt witnessed a US dollar outflow which prompted the Central Bank of Egypt (CBE) to take an exceptional bunch of corrective measures, among them raising the key interest rate by 1 per cent, in an attempt to prevent dollar haemorrhage. At the same time, the National Bank of Egypt (NBE) and Banque Misr launched one-year saving certificates with 18 per cent annual yield, a substantial leap from the preceding 11 per cent annual interest rate on time deposits and saving certificates. The initiative by NBE and Banque Misr aimed at reducing fluidity in the market and encouraging Egyptians to save in Egyptian pounds, also to compensate for the rising inflation.
International financial institutions approved the measures taken by Egypt, confirming their positive impact on the economy by making the Egyptian market attractive to foreign investors and global investment funds, and improving the ranking of the Egyptian pound.
Yet all these measures could not rein in the price spikes in Egypt, which are understandable and justified given the turbulence in global markets. The Egyptian government is in fact relentlessly working on containing the escalation of prices of basic and strategic commodities, sometimes absorbing the bigger part of the price increase by raising the margin of subvention, or through imposing strict market control to curb greed of merchants.
The government’s measures mainly apply to the basic commodities essential for daily living, but not to luxury, non-essential, or durable goods which consumers can afford to temporarily do without. It is expected that repricing such goods according to the new market standards would inflate their prices beyond the purchasing capacity of consumers.
The wide gap between the market value of commodities and the purchasing power of consumers leads to a deadlock: sales undergo a downward spiral because consumers cannot afford the goods. The government is in no position to intervene to curb the prices of durable or non-essential goods, and has enough on its plate attempting to control the prices of basic commodities. The resulting tug of war between traders and consumers brings to mind the situation in November 2016 when the CBE floated the Egyptian pound. Back then, prices of non-essential and durable goods, including cars, skyrocketed to unprecedented levels, to nearly double their value before the pound was floated. Consumers were shocked and unable to match the new prices. Yet suppliers had to weather global price increases and escalating freight costs, let alone the huge leap in dollar rates which almost doubled after the pound was floated. Yet consumers were helpless, and refrained from buying for over a year, causing a recession in the market of durable and non-essential goods. Both consumers and suppliers were defiant: suppliers would not revise their prices, and consumers could not afford them. At the time, a hashtag in Arabic that translates into “Let it rust” was launched on social media, prompting consumers to boycott cars and durable goods, and telling suppliers that, at their set prices, they might as well keep their goods till they rust. The result was recession and increased unemployment.
The situation kept getting worse until the relevant chambers of commerce intervened to narrow the price-consumer capacity gap. They persuaded suppliers to revise their generous profit margin if they were to get the wheels rolling on the market. Suppliers responded by renouncing obstinacy; they revised their profit margins and set new prices more affordable to consumers. Bit by bit, the market recovered.
The experience was an interesting one in how the market could adapt to consumer capacity. Today, with what many have come to term the “second floating of the Egyptian pound”, we find ourselves before the same scenario. Have traders and suppliers of durable and non-essential goods learned the lesson? And will they bend before the storm till it passes in order to preserve the market and spare Egypt recession and unemployment?
Watani International
7 April 2022
