Price Controls To Have Negligible Impact


BMI View: We do not expect the price controls announced by Egypt's interim government to have a significant impact on the country's inflation. Indeed, the measure will be restricted by the potential for a black market to emerge as well as our expectation for further currency devaluation . In addition, the government's expansionary monetary policy will also mitigate the price controls' effectiveness. We maintain our forecast for headline inflation to reach 11.0% by the end of 2013, averaging 9.5% over the course of the year .

The price controls on certain foods announced by Egypt's interim government will have a negligible impact on the country's inflation rate. The Minister of Supply , Mohamed Abu-Shadi , has ordered grocers to reduce prices, or he will set prices and allot them a profit margin of 25 % . The practicalities of the policy have yet to be clarified, or indeed which foodstuffs will be affected. Food has been targeted as they the largest contributor to inflation (with a weighting of 40% of the basket), accounting for over half the increase in August. Indeed, food price inflation has been a constant pull on the headline CPI basket over the last two years.

We do not expect the policy to have a significant impact on CPI for several reasons. First, its effectiveness will be reduced as a black market is likely to spring up, as official supply is reduced in line with prices. Unless the interim government threaten and enforce significant fines for such trading, a parallel market will likely take hold, as has been the case with subsidised fuel.

Food Prices An Obvious Target
Egypt - Composition Of CPI Basket

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This article is tagged to:
Sector: Country Risk
Geography: Egypt