Mubasher: Egypt’s budget deficit is likely to settle at 11.5% of the growth domestic product in the fiscal year 2016/17, according to a report issued by Pharos Research.
Further, FX free flotation is expected to add EGP 51.8 billion in terms of fuel and food subsidies, the research agency added, revealing that interest rate hike by 300 basis points is to add another EGP25.1 billion in additional interest expense.
The increase in interest rate was needed “to support the local currency by easing dollarization, attracting foreign funds and most importantly anchoring inflation expectations, the report indicated.
In response to FX liberalization, citizens would flash to hedge against weaker purchasing power in the future that are consequently seen adding to the current inflationary pressure.
“Accordingly, the interest rate hike is meant to offset the aforementioned behavior by making savings more attractive than consumption”, Pharos stated.
Inflation is forecast to accelerate to 21.6-25% in the short-term and to average around 16-18.5% in FY2016/17.
Given the fact that a wide array of market participants are dealing with the parallel market rates, the official exchange rate pass-through will peak in three months’ time. Similarly, the price reaction to the fuel subsidy cut is to peak within three months, the report highlighted.
