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Cablegate: Inflation Reaches 14.4% in March

VZCZCXYZ0005
RR RUEHWEB

DE RUEHEG #0779 1061645
ZNR UUUUU ZZH
R 151645Z APR 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8940
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0399

UNCLAS CAIRO 000779

SIPDIS

SIPDIS

STATE FOR NEA/ELA, NEA/RA AND EEB
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND CONNOLLY
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV EG
SUBJECT: INFLATION REACHES 14.4% IN MARCH

REF: A. Cairo 587
B. Cairo 720

1. (U) Egypt's inflation rate continued to climb in March, reaching
14.4% year-on-year (yoy) in March, a three-year high, up from 12.1%
in February (ref A). Food inflation led the way, rising 20.5% yoy
in March, up from 16.8% in February. Bread and grain prices
increased 48.1% yoy and food oil 45.2% yoy. Month-on-month (mom)
inflation increased to 2.5% in March, up from 0.8% mom in February.
Food has a weight of 43.9% in the Egyptian CPI and accounted for 9%
of the rise in the headline inflation rate in March, according to
the government statistic agency CAPMAS.

2. (U) The Central Bank's interest rate increases over the past two
months have done little to slow inflation. Analysts predict CBE
will again raise interest rates by at least 50 basis points at the
next meeting of the Monetary Policy Committee on May 8. Analysts
remain skeptical that interest rate increase alone will slow
inflation, and predict that CBE will slow its accumulation of U.S.
Dollar reserves, thereby allowing greater appreciation of the
Egyptian Pound against the U.S. Dollar. The current exchange rate
is approximately LE5.5/$1, but analysts estimate the rate will be
LE5.25/$1 by the end of 2008.

3. (U) While the Central Bank tries to move its monetary policy
toward inflation targeting, the rest of the GOE is trying to find
other solutions to inflation and the "bread crisis" it has spawned.
The Ministry of Trade and Industry (MOTI) recently waived import
tariffs on around 20 food item, including basic grains/cereals and
cooking oil, and construction inputs such as steel and cement. MOTI
also placed a ban on rice exports beginning April 1, after exporters
failed to abide by a voluntary export ban instituted by the Rice
Exporters' Association last January. President Mubarak is reported
to have order his ministers to identify funds in the state budget to
increase food subsidies to LE20 billion ($3.6 billion) and wages of
public employees to LE73 billion ($13.3 billion) in the budget for
FY2008/09, which begins 1 July.

4. (U) The GOE's administrative actions have had mixed results. At
markets in the Nile Valley town of Beni Suef, we observed on April 8
that rice prices were between LE3 ($.55) and LE3.60 ($.65)/kilo,
down from a high of LE5 ($.91) observed in Cairo markets in late
March, before imposition of the export ban. The price of cooking
oil, on the other hand, had reached LE10($1.85)/liter, up from LE
8.50($1.55) observed in Cairo in March. The increase came despite
removal of import tariffs on cooking oil. President Mubarak's
decision to open military and police bakeries to civilian customers
(ref A) has not had a noticeable effect on the bread crisis. Lines
remain long, and tensions high, at subsidized bakeries, where
customers complain about continued scarcity of subsidized bread (ref
B).
RICCIARDONE

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