Inflation must be driver for change in Egypt

11 July 2008
Cairo must make further reforms to cut bureaucracy, boost productivity and free up Egypt’s economy.

With inflation at 20 per cent and rising, Egypt’s businessmen are right to be concerned. As inflation rises, so does the risk of macroeconomic instability.

Like the Gulf states, which are suffering from their own inflation scares, Cairo is blaming international factors outside its control.

It has a point, but such views could leave the government thinking it can do little except wait and hope for prices to at least level off.

But a levelling off is not enough. While inflation would fall if prices stabilise, it would still leave the cost of living uncomfortably high for most Egyptians.

The cost of inflation for businesses and government is also becoming apparent. Companies are paying their staff more, and Cairo’s borrowing costs will rise as its credit ratings are downgraded. While the tax take is growing along with the economy, so is the burden of food and fuel subsidies.

There is much that has been positive about Egypt’s economic performance in recent years. The private sector has been expanding fast, there have been widely welcomed reforms and overall growth has been strong.

In particular, Cairo has had great success in attracting foreign direct investment. However, if inflation persists at a far higher rate than its regional peers, that record could be undermined. International businesses prefer to invest in stable economies.

To keep its economy on track and maintain its attractiveness, further reforms are needed to cut bureaucracy, boost productivity and free up the economy. More can also be done on education and training to improve the quality of the workforce.

If no action is taken, the gains could be eroded even more quickly than they have been made.

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