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Cablegate: Egypt: Inflation Update


DE RUEHEG #3257/01 3181536
R 141536Z NOV 07





E.O. 12958: N/A
SUBJECT: Egypt: Inflation Update

REF: Cairo 3021

Sensitive but Unclassified. Please handle accordingly.


1. (U) Inflation dropped to 7.5% year-on-year (y/y) in October,
down from 9.3% y/y in September. The CBE maintained interest rates
unchanged at a November 1 meeting, but indicated that inflation
could reach the upper limit of CBE's "comfort zone." This is the
first public sign of a move toward an inflation targeting monetary
policy. Recent appreciation of the Egyptian pound (the pound or LE)
against the U.S. dollar is further evidence that CBE is moving away
from a pegged exchange rate, a necessary step for inflation
targeting to work. While rising international commodity prices are
driving inflation, greater domestic demand and rising wages have
also contributed. Economic growth has not "trickled down" to the
lower classes, however, and most Egyptian have only experienced the
downside of growth: rising prices.

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Inflation Declines in October

2. (U) Egypt's headline inflation rate dropped to 7.5% y/y in
October, from 9.3% y/y in September, according to figures released
by the Central Agency for Public Mobilization and Statistics
(CAPMAS). CAPMAS has not yet released figures for specific
categories of the Consumer Price Index (CPI) in October, but
analysts expect food prices will show the greatest increase, as they
did in September. Food prices rose 16.4% in September, due in large
part to the effect of Ramadan (reftel), which began in mid-September
and continued through mid-October. A recent report by the Ministry
of Social Solidarity indicated that prices of flour increased by 50%
y/y in October, edible oil by 20% y/y, dairy products by 15% y/y,
and meat/poultry by 11% y/y.

CBE Maintains Interest Rates

3. (U) At its November 1 meeting, CBE's Monetary Policy Committee
(MPC) kept overnight interest rates unchanged at 8.75% (deposit) and
10.75% (lending). A press statement after the meeting indicated the
decision was based on a September inflation figure of 8.8% y/y,
using the old CPI. The statement recognized that the rate for
September increased to 9.3% when using the new CPI introduced that
same month. According to CBE, current inflation is driven mainly by
rising domestic food prices on the back of higher international
commodity prices. Rising food prices are driving inflation in other
sectors, as is increased demand from higher economic growth. Over
the medium-term, inflationary pressure could rise above the upper
level of CBE's "comfort zone," according to the statement. CBE said
it would continue to monitor economic developments, especially
factors underlying inflation, and would not hesitate to adjust
interest rates to ensure medium-term price stability.

Inflation Targeting v. Pegged Exchange Rate

4. (U) This is the first public mention of a "comfort zone" for
inflation, an indication that CBE is moving toward an inflation
targeting monetary policy with benchmark interest rates as the
anchor. Recent movement in the LE/$ exchange rate is further
evidence that CBE is moving away from a de facto pegged exchange, a
necessary step for inflation targeting to work properly. The pound
has appreciated 3.8% since July (from 5.75 $/LE to 5.46 $/LE
currently). In a recent report on Egypt, Deutsche Bank projected
the exchange rate would reach 5.35 $/LE by year end, calling the
appreciation evidence of a "regime shift at CBE."

5. (U) Most of Egypt's imported food commodities, such as wheat,
corn and edible oil, are priced in U.S. dollars, so Egypt imports
the inflation that comes with the rising cost of those goods. While
the pound's appreciation against the dollar may dampen inflation,
food prices are likely to continue rising, as approximately 40% of
Egypt's food imports, mostly processed foods, come from the EU. The
pound has recently lost value against the euro, moving from LE
7.6/1 in July to LE8/1 currently.

Domestic Demand

6. (U) Although rising import prices are the main inflationary
pressure in Egypt, domestic growth and higher wages have also
contributed. Demand pressures are particularly evident in the
booming construction sector. Steel and cement prices have risen
sharply, with the latter being less susceptible to international
pressures and more dependent on domestic demand factors. Average
ex-factory cement prices have risen from LE177 ($32) in 2003 to over
LE350 ($64) per ton in 2007. Bank credit to the private sector has
also increased significantly, reaching 12.3% in June 2007, up from
8.6% in June 2006. Credit growth from the highly liquid banking
sector is likely to continue over the next year, supporting the
current investment boom and greater private consumption.

Wage Growth

7. (U) While most analysts note that wages, particularly for the
lower classes, are not keeping pace with inflation, there are signs
of rising wages in some sectors. Official wage data are unreliable,
but anecdotal evidence suggests that wages for unskilled labor are
rising in the construction sector. Construction wages grew 25% over
the past three years, a level high enough to entice Egyptian workers
back from the Gulf, according to Minister of Housing Ahmed
El-Maghrabi. Speaking to the press, Maghrabi stated that wages for
unskilled daily labor - used in both construction and agriculture -
have risen 15% over the past year alone. His statements were echoed
by Hanaiya El-Itriby, Head of the Agricultural Research Center, who
told us that agricultural labor prices are rising, as more day
laborers are choosing to work on construction sites rather than in
the fields. Wages in the textile industry have also increased over
the last few years. According to figures released by the Ministry
of Finance, wages in the garment industry rose from LE350
($64)/month in 2004 to LE800 ($146)/month currently.

8. (U) Wages for skilled workers are also on the rise. The GOE
implemented a 50% increase in teachers' base salaries in June 2007
and recently announced that journalists' wages will soon go up by LE
200/month. A study released in early 2007 by the Hay Group, an
international human resources consulting firm, predicted an 18%
increase in fixed salaries (salaries + benefits) for professionals
and senior managers, based on the salary trends of 85 companies in
various sectors in Egypt over the last few years. Construction and
petroleum/gas companies have been offering internationally
competitive salaries to attract high-caliber employees in the last
few years, forcing companies across the board to raise salaries to
compete for skilled labor.


9. (SBU) While high levels of economic growth and rising wages are
positive trends, many of the poor have yet to see the benefits of
economic expansion. The poor have, however experienced the downside
of economic growth in the form of higher prices. Inflation,
particularly increased food prices, disproportionately affects the
poor, who spend a higher percentage of their income on basic food
items. Saeed El Alfy, Head of Egypt's Consumer Protection Agency
and a member of the NDP General Secretariat, told us that his agency
receives thousands of calls a week, 90% of which are complaints
about high prices. Although his agency can do nothing to regulate
prices, the Egyptian public still believes it is the government's
responsibility to keep prices artificially low. It is this
perception that makes rationalizing subsidies, particularly food
subsidies, such a difficult task for the government, according to El
Alfy. The government and the NDP have recently ratcheted up
attention to the problem, making social issues the key subject of
the recent NDP conference. Despite attention to the issue, the
government has yet to articulate a vision for improving social
benefits, adding to the frustration of the lower classes.

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