The International Monetary Fund (IMF) expects Egypt’s headline inflation rate to “come down during the second quarter of this calendar year,” IMF’s Mission Chief in Egypt Chris Jarvis said on Wednesday.
“We would expect the monthly increases in inflation to drop sharply by the second quarter of this year and the headline rate of inflation...to begin to fall then as well,” Jarvis stated.
Jarvis, in an online press conference revealing the first comprehensive report released by the IMF on 2016's $12 billion loan agreement with Egypt, said the headline inflation “has been slightly higher though not much higher” than expected.
Egypt’s annual headline inflation reached 24.3 percent in December, compared to 20.2 the month before.
If inflation drops later this year it would be seen as an “important metric of success of the program,” Jarvis said.
Jarvis cited several reasons for the rate's gradual increase—which reached its highest in December—including an increase in commodity prices tied to rising fuel prices, and the depreciation of the Egyptian pound's value against the dollar.
"I think what's more likely is that there has been what's called some overshooting of the exchange rate," the IMF official said when asked about the fair value of the pound against foreign currencies, adding that "[the current] exchange rate is more depreciated than we expected given the fundamentals."
Egypt has undergone a foreign-currency crunch over the past year, prompting the central bank to float the Egyptian pound in November. The move allowed the pound to drop drastically in value, from EGP 8.88 to the dollar pre-float to EGP 18.5.
"It's a genuine equilibrium exchange rate," Jarvis said, with the demand for foreign currencies roughly equaling supply. "That, I think, has already been achieved, which is a tremendous improvement in terms of increasing the availability of foreign exchange in Egypt," he added.
If policies are kept reasonably tight, Jarvis said he expects no “further depreciation of the exchange rate,” and possibly an appreciation with “broad stability in the exchange rate.”
